US Debt Crosses $40 Trillion, Raising Treasury Yield and Equity Risks
US public debt has crossed $40 trillion. Jefferies warns of upward pressure on Treasury yields, which could hurt equities and limit Fed flexibility.
The United States has crossed a significant fiscal milestone, with public debt now exceeding $40 trillion. According to a research note from Jefferies, this deepening fiscal strain is becoming a key risk for global markets, potentially pushing long-term Treasury yields higher and constraining the Federal Reserve's policy options.
The brokerage highlights that the fiscal deficit widened to $432 billion in July, the highest monthly figure since March 2021 and a record for that month. For the first ten months of the fiscal year, the deficit has reached $1.799 trillion, already surpassing the full-year FY25 deficit of $1.775 trillion. The annualised deficit-to-GDP ratio also rose to 6.1 per cent in July, up from 5.7 per cent in June.
Jefferies expects this deterioration to keep upward pressure on long-term yields. With nominal US GDP growth averaging 5.9 per cent over the past 12 quarters, the brokerage argues that growth running above the 10-year Treasury yield signals that yields should move higher. Recent auctions reflect this strain: the 10-year Treasury auction yield hit 4.683 per cent, the highest since 2007, while the 30-year auction yield climbed to 5.216 per cent, its highest since 2001.
The fiscal picture is compounded by rising spending and weaker receipts. Federal outlays surged 21.7 per cent year-on-year in July, while receipts fell 1.3 per cent. National defence spending rose 19.9 per cent during the month. Net interest and entitlement spending now account for 98.4 per cent of annualised government receipts, underscoring the growing burden.
Looking ahead, Jefferies identifies the 10-year Treasury yield crossing 5 per cent as a key trigger. The yield was around 4.69 per cent after recently touching 4.746 per cent. Treasury Secretary Scott Bessent's plan to at least double long-term Treasury buybacks could help contain the rise, but underlying fiscal pressures remain.
The brokerage also notes that the Treasury's growing reliance on short-term funding and intervention to support the long end highlights constraints on monetary policy. Jefferies believes the fiscal backdrop is ultimately supportive for gold, while higher-yield risks could make equity valuations increasingly vulnerable if the 5 per cent threshold is breached.