The bond market is beginning to revolt against America

The US is risking a sovereign debt reckoning as fiscal profligacy meets Japan’s reawakening and record Big Tech borrowing, pushing yields – and political pressure – higher in the lead-up to midterms.

Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

Is the great sovereign debt crisis finally upon us? Perhaps not yet. But global bond markets are beginning to look distinctly more fragile, and the behaviour of the US Treasury suggests that those within the Trump administration have not only noticed. They are starting to panic.

With the US midterm elections less than three months away, Donald Trump and his administration are confronting an awkward economic reality. The president, in his bid to get re-elected, repeatedly promised cheaper money. Instead, long-term borrowing costs just keep going up. Last week, in a desperate bid to put a lid on yields, the Treasury said it would at least double its buyback of longer-dated government bonds, taking purchases to about $32-billion a quarter.

The stated justification is a classically Trumpian euphemism – “liquidity support”. That is technically true; the buyback programme was created in 2024 to improve market functioning. But that is not what is happening now. The political motivation is hard to refute. Thirty-year Treasury yields have touched their highest since 2007. Mortgage rates are back near 7%. For households promised easier financing conditions, and now facing higher gas prices and stubborn inflation, the Trump administration is proving even less capable than the Biden government at handling the economy.

What makes the latest intervention even more absurd is its futility. After briefly moving lower by 0.1%, long yields have since given up almost all their gains.

This is, of course, only the most recent attempt by Scott Bessent’s Treasury to coax long-term yields lower. The administration has relaxed capital requirements to make it easier for banks to hold long-term bonds. It backed the GENIUS Act, establishing a framework by which stablecoin issuers can become holders of US Treasuries, theoretically opening another source of demand as some traditional lenders to the US government – foreign governments like China and Gulf countries – start to tire. It also intervened to strengthen the yen, a move which conveniently reduced the incentive for one of America’s largest foreign creditors – Japan – to sell Treasuries in favour of buying its own debt.

None of these measures however has worked. The effects of July’s yen intervention began fading almost immediately. And even a doubling of Treasury buybacks remains tiny in comparison with the $31-trillion Treasury market, and the global forces that are pushing long yields ever higher.

The first of these forces is Japan. After a quarter of a century of dormancy, inflation has returned to Japan. Ten-year Japanese government bond yields, which compete with Treasuries for the same global pool of savings, sit at roughly their highest in three decades.