Macro & Markets: Higher yields, heavier debt

US growth is currently cushioning the fiscal strain from higher yields, but a slowdown combined with persistent borrowing costs would make the debt outlook materially more challenging.

• The 10-year Treasury yield rose by around 50 basis points in September, while the 10-year TIPS yield increased by a similar amount and inflation compensation moved only slightly, indicating that higher expected real rates were the main driver.
• A CBO sensitivity scenario in which rates rise gradually to 1 percentage point above its 4% baseline results in publicly held debt reaching 222% of GDP in 2056, or 47 percentage points above the baseline.
• Treasury buybacks provide limited support: investors offered $14.76bn of bonds in the latest operation, but the Treasury accepted only $1.22bn, below the $4bn maximum.
• Japanese demand for Treasuries could become more price-sensitive as Japanese government bond yields rise, while a smaller Federal Reserve balance sheet could reduce official demand and increase the term premium.
• The CBO projects a federal budget deficit of around $2tn in fiscal 2027, while hyperscalers are expected to issue substantial debt for AI investment, intensifying competition for capital; in Europe, 30-year French OAT yields approached 5.5% and the spread over German bonds reached its highest level since 2011.

Takeaway: Higher US yields remain manageable while growth is strong, but investors should monitor weaker activity, a rising term premium, reduced foreign or Fed demand, and growing public and corporate issuance because these could push yields and debt-service costs higher.