The 10-year Treasury yield surpassed 5% last week, hitting the highest level since 2007 and far exceeding forecasts for borrowing costs over the next decade. According to the Congressional Budget Office’s most recent long-term outlook released in February (before the Iran war sent oil prices and inflation prospects soaring), the benchmark yield was estimated at 4.1% this year and 4.2% in 2027. The 10-year yield was expected to hover around 4.3% from 2028 to 2031, then rise to 4.4% from 2032 to 2032. 2036. As for other borrowing costs, yields determine how much the Treasury Department must pay in interest on U.S. debt, which can accelerate as rates rise. Certainly, the end of the war in Iran and lower energy costs would help reduce yields, but that is not the only source of bullish pressure. The economy is heating up and the labor market is tight, meaning higher yields represent some normalization from crisis-era lows. The $40 trillion in US debt that has accumulated, as well as the $2 trillion in annual budget deficits that show no signs of improving, are also factors. At the same time, other heavily indebted countries and AI hyperscalers are competing for bond investors’ capital, so auctions require attractive yields to attract enough demand. Then there is the geopolitical environment. Recent wars, trade frictions and disasters have produced shocks so frequent that they are no longer considered isolated events but a sign of a less stable world. That risk is also included in the returns. If we add all this, the future seems more expensive. The Committee for a Responsible Federal Budget estimated that if yields remain more than 80 basis points above baseline projections, the United States will spend $2.7 trillion on annual interest payments by the end of the decade, more than Medicare or Social Security retirement benefits. “The real threat is the debt spiral. If interest begets debt, and debt begets interest, eventually debt will spiral out of control. A fiscal crisis, once unthinkable, is now a clear possibility,” Maya MacGuineas, president of the CFRB, said Monday. The budget watchdog and others have been sounding the alarm about the debt and deficit for years. But the rapid deterioration of the Treasury market now alarms those who previously downplayed the risks. The yield on the 10-year bond has risen one percentage point since just before the war with Iran began in late February and half a point in the last two months alone. Market veteran Ed Yardeni, who coined the term “bond vigilantes” to refer to traders who protest huge deficits by selling bonds to raise yields, had argued that yields of 4% to 5% are a normal range for a strong U.S. economy. As yields rose over the summer, he was unfazed, saying there were still no signs that bond watchdogs were rebelling. But that is changing. “We will worry about a debt crisis when the bond market worries about a debt crisis,” Yardeni wrote in a note Tuesday. “We are now starting to worry that the 10-year US Treasury yield may be about to surpass 5.00%.” Jared Bernstein, who served as chairman of the Council of Economic Advisers during the Biden administration, has also seemed more like a debt hawk than a dove. In a New York Times op-ed on Monday, he noted that he hasn’t been an alarmist about the national debt in years and even criticized those calling for more budget austerity. But the math has changed, Bernstein explained, pointing to rising interest rates, the huge deficit and the unwillingness of either party to address the problem. “My point here is not to analyze the relative merits of different ways to stop digging,” he wrote. “That is, while I can’t tell you the day and time the fire will ignite, I can tell you that we are getting closer. And we are doing so at a rate that even this non-alarmist finds alarming.”
