One month after the bond market went ballistic, with the 10-year Treasury yield breaching 4.7% and the 30-year Treasury yield skyrocketing to 5.17%, the market is now well and truly imploding. The benchmark 10-year hasn’t come down, and the 30-year has catapulted toward 5.3%, hitting its highest level since before the Great Recession.
The financial fracas prompted Treasury Secretary Scott Bessent to announce on Wednesday that the Treasury would “at least” double buybacks of long-term bonds to stave off the sell-off. The strategy worked — for less than 12 hours. By Thursday morning, the 30-year yield had fallen, then risen some 10-odd basis points again.
Bessent is correctly panicking because roughly a third of our $32 trillion in publicly held debt is maturing in the next 12 months, meaning that roughly $10 trillion worth of debt that was financed an average of six years ago is maturing into a market where interest rates are 300 to 400 basis points higher than they were in 2020. But his tool kit is limited. In the case of Treasury buybacks, Bessent is taking out new debt to buy back old debt at higher interest rates, in the hope that the aggregate effect will depress interest rates enough to justify the trade through lower borrowing costs for that $10-ish trillion that’s maturing this year.
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The problem is that, as evidenced by the 12-hour reprieve in long-term rates, Bessent’s bet did not work. It did not work because Treasury buybacks do not solve the problem of the $40 trillion national debt that bond vigilantes realize Congress does not care about. At all.
As I wrote last week, bond investors are not responding to the umpteenth month of President Donald Trump pretending to negotiate with a suicidal theocracy in the futile hope of reopening the Strait of Hormuz through a peaceful diplomatic deal. Rather, investors are realizing that Congress has come to a bipartisan consensus that it will do nothing to curb the entitlement explosion that is fueling a deficit that now amounts to 3.3% of our entire annual economic output at the exact same time that the private sector’s AI and data center build-out is demanding trillions of dollars. Next to the double-digit returns guaranteed by hyperscalers, the U.S. government’s ability to pay back its creditors is looking like a much less certain bet.
Leftists will lie that the fiscal crisis is caused by insufficient taxation, even though the tax cuts in the One Big Beautiful Bill Act resulted in a 7% increase in individual income tax collections this year. Cowardly Republicans will claim we can just grow our way out of our debt or focus on discretionary “waste, fraud, and abuse” without touching entitlements. This is arguably the more pernicious falsehood because serious people pretend to believe it.
The reality is that, whereas overall federal spending has risen 4% in the first 10 months of the fiscal year, Social Security outlays are up 5%, and Medicare and Medicaid are up 8% each. Almost every single dollar of individual income taxes sent to Uncle Sam so far this year ($2.365 trillion) is going solely to Social Security and Medicare ($2.325 trillion). Two out of every three dollars collected by the federal government is going to Social Security, Medicare, and Medicaid.
We have spent $200 billion more on financing the national debt this year than on defending this country. That’s the same amount by which the CBO increased its projection of our total budget deficit for fiscal year 2026, to $2.1 trillion.
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We will have entered the technical definition of a fiscal crisis when the interest rate on government debt exceeds the rate of our economic growth. Even a $40 trillion national debt is theoretically sustainable indefinitely when the 10-year yield is 2% and GDP grows by 2.5%. But right now, the average interest rate on the total marketable debt outstanding is 3.443%. GDP grew by only 2.1% on an annualized basis in the first quarter of this year and a mere 1.5% in the quarter after that.
Bessent has proven masterful at moving markets on the margin, but ultimately, the fears that a $40 trillion national debt inspires in investors cannot be assuaged by one man. Unless Congress decides to do the hard thing and start touching that third rail of politics, interest rates from the 30-year Treasury to the 30-year fixed mortgage will continue to meander upward.