{"id":7031,"date":"2026-05-23T21:29:18","date_gmt":"2026-05-23T21:29:18","guid":{"rendered":"https:\/\/stock999.top\/?p=7031"},"modified":"2026-05-23T21:29:18","modified_gmt":"2026-05-23T21:29:18","slug":"us-debt-is-the-elephant-in-the-room-amid-bond-rout-as-interest-costs-could-drive-larger-deficits","status":"publish","type":"post","link":"https:\/\/stock999.top\/?p=7031","title":{"rendered":"US debt is the ‘elephant in the room’ amid bond rout as interest costs could drive larger deficits"},"content":{"rendered":"

<\/p>\n

Recent weeks have seen a major selloff in the bond market as high oil prices spike inflation, but deteriorating U.S. fiscal health is increasingly a dominant factor, according to analysts at Bank of America.<\/p>\n

In a note on Friday, BofA announced that the so-called\u00a0bond vigilantes have returned, referring to traders who protest huge deficits by selling off bonds to push yields higher.\u00a0 <\/p>\n

That\u2019s as long-term yields hit the highest levels since the Great Financial Crisis on Tuesday due to hot inflation data, lack of a deal to reopen the Strait of Hormuz, strong consumer spending, and continued resilience in the labor market. <\/p>\n

\u201cIn our view, unsustainable fiscal dynamics are compounding with a reflation story, turning a short-term problem into a long-end selloff,\u201d analysts wrote.<\/p>\n

But that\u2019s not the whole story. Economic data indicating more inflation as well as ongoing uncertainty about the Iran war preceded the bond market rout, BofA pointed out.<\/p>\n

Plus, high inflation and resilient growth would typically lead markets to price in rate hikes from the Federal Reserve, flattening the yield curve as short-term rates rise more than long-term rates.<\/p>\n

However, the opposite happened as the yield curve got steeper with long-term rates leading the charge higher. In fact, the 30-year yield hit 5.18% on Tuesday, the highest since 2007.<\/p>\n

\u201cFiscal policy is the elephant in the room,\u201d BofA declared, adding that worsening U.S. fiscal dynamics were a key driver of the selloff.<\/p>\n

The federal government has already signaled it must issue more debt than expected as cash flow weakens with President Donald Trump\u2019s tax cuts delivering bigger refunds this filing season.<\/p>\n

Meanwhile, the jump in yields in recent months is making interest payments on U.S. debt costlier. The Committee for a Responsible Federal Budget estimated this week that if rates remain about 55 basis points above Congressional Budget Office projections across the yield curve, then debt would increase by $2 trillion more over the next decade.<\/p>\n

In addition, interest costs would grow from $970 billion in 2025, or 3.2% of GDP, to $2.5 trillion by 2036, or\u00a05.3% of GDP. That also means debt servicing would consume 30% of federal revenue by 2036, up from 19% in 2025, according to CFRB.<\/p>\n

So if the Fed hikes rates to rein in inflation, the bond market could factor in the spillover effects on the U.S. debt outlook.<\/p>\n

\u201cIn an environment where Fed could potentially be on the table and become a driver of even larger fiscal deficits amid rising debt servicing costs, the long end of the curve becomes more sensitive to what should be primarily a move in short-end rates,\u201d BofA said.<\/p>\n

The market still has faith that the Fed is ignoring political pressure from Trump to lower rates and is instead focused on maintaining price stability, the note added.<\/p>\n

On Friday, Trump told new Fed Chairman Kevin Warsh to \u201cdo your own thing\u201d as he was sworn in. Also Friday, Fed Governor Chris Waller vowed to hike rates if consumers\u2019 expectations of long-term inflation become untethered. <\/p>\n

\u201cThe question is not so much whether the Fed should hike, but rather if it will be able to do so amid political pressure shall the fundamentals really ask for it,\u201d BofA warned. <\/p>\n

Meanwhile, recent U.S. debt auctions signaled tepid demand for longer-term Treasuries. Earlier this month, the Treasury Department sold $25 billion of 30-year bonds at a 5% yield for the first time since 2007. Before then, no 30-year Treasury carried an interest rate above 4.75%.<\/p>\n

It was a stark contrast from mid-February\u2014just before the U.S.-Israeli war on Iran started\u2014when a Treasury offering saw the highest demand ever in the history of 30-year auctions.<\/p>\n

In addition to the latest auction of so-called long bonds, sales of three- and 10-year Treasuries also drew less demand than expected.<\/p>\n

Skittishness among bond investors is becoming a trend. In March, auctions for two-, five- and seven-year Treasury notes\u00a0all saw weak demand, forcing yields to go higher than expected.<\/p>\n

For his part, Treasury Secretary Scott Bessent insisted that the current energy shock will just be a momentary blip, though he admitted that it could take six to nine months for U.S. oil prices to come back down.<\/p>\n

He predicted oil producers will eventually unleash a flood of supply, noting U.S. output is at record highs and the United Arab Emirates\u2019 exit from OPEC means it won\u2019t be limited by the cartel, while other Persian Gulf countries will \u201cpump like crazy.\u201d<\/p>\n

\u201cI firmly believe that nothing is more transient than a supply shock and we can we can look through that,\u201d\u00a0Bessent told\u00a0CNBC\u00a0earlier this month.<\/p>\n

#debt #elephant #room #bond #rout #interest #costs #drive #larger #deficits<\/p>\n","protected":false},"excerpt":{"rendered":"

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