The US national debt, bond yields, and the bond market were hot topics for investors this week. First of all, the US national debt crossed the $40 trillion mark this week. It took 9 years to go from $10T to $20T of debt, 4.5 years to go from $20T to $30T, and another 4.5 years to go from $30T to $40T.
usdebtclock.org
Unfortunately, the US federal budget deficit number is underestimated above as the Treasury Department shows that the current fiscal year deficit is $1.8 trillion and will likely finish the year at $2.1 trillion. This is higher than forecasted due to lower tariff revenue and the refunding of previously collected tariffs that were struck down by the courts. The federal government must borrow more money to refund the $166 billion collected, but this is a windfall for companies receiving refunds, such as Walmart, who has stated they will use the billions they received to cut prices for consumers.
https://finance.yahoo.com/economy/policy/articles/walmart-used-3-billion-tariff-233922554.html
But now is not a good time to be borrowing more money. Bond yields have been rising since March on concerns the war in Iran will lead to higher inflation.
When inflation is higher, lenders typically demand a higher interest rate to account for the weaker currency they will receive when the loan comes due.
Additionally, the US government is finding itself competing with US companies when borrowing money as AI-related spending (and therefore, borrowing) is exploding higher.
Estimates of total AI-related borrowing for full-year 2026—extending beyond the hyperscalers (Alphabet, Amazon, Microsoft, Meta, and Oracle) to the wider ecosystem of chipmakers, data-center developers, and utilities—range from roughly $300 billion to $570 billion. As spending is expected to increase dramatically in the years to come, bond issuance will as well.
With more options available to lenders in the investment-grade bond market going forward, the US government will likely pay higher interest rates than it otherwise would need to in order to attract buyers for its treasuries.
So rising bond yields (borrowing costs) caused the Treasury Department this week to interfere, I mean intervene, in the markets in an attempt to drive longer-term yields lower. These are the rates that most heavily impact mortgage rates, car loans, and other consumer lending rates.
Janet Yellen did something similar in 2023 when she was head of the Treasury Department, so while it can be a bit controversial, it’s not something new.
Meanwhile, stocks are marching higher as the borrowed money gets spent.
Have a great weekend.
Jack C. Harmon II, CFP®, CIMA
Principal, Harmon Financial Advisors
Registered Principal, Raymond James Financial Services
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