US debt tops $40 trillion, fueling Treasury yield risks: Jefferies

US fiscal deterioration is emerging as a significant risk for global markets, according to Jefferies. The brokerage highlights that the nation's public debt has crossed the $40 trillion mark, accompanied by a widening fiscal deficit. This situation could lead to persistently elevated long-term borrowing costs.

“

US fiscal deterioration is increasingly becoming a key risk for global markets, with higher Treasury yields potentially putting pressure on equities and constraining the Federal Reserve's policy flexibility.

The US fiscal deficit recorded $432 billion in July, marking the highest monthly deficit since March 2021 and a record for that month. For the first 10 months of the fiscal year, the deficit reached $1.799 trillion, surpassing the full-year FY25 estimate of $1.775 trillion. Consequently, the annualized fiscal deficit-to-GDP ratio climbed to 6.1% in July from 5.7% in June.

Jefferies anticipates continued fiscal deterioration will exert upward pressure on long-term Treasury yields. The firm notes that nominal US GDP growth has averaged 5.9% over the past 12 quarters. When nominal growth exceeds the 10-year Treasury yield, it signals a potential for yields to rise further. Recent Treasury auctions have underscored this pressure, with the 10-year yield hitting 4.683% and the 30-year yield reaching 5.216%, levels not seen in years.

“

Nominal US GDP growth has averaged 5.9 per cent over the past 12 quarters, and the brokerage argues that nominal growth running above the 10-year Treasury yield is a signal that yields should move higher.

Government spending has surged, with federal outlays increasing by 21.7% year-on-year in July, while receipts declined by 1.3%. National defense spending alone rose 19.9% during the month. The growing fiscal burden is evident as net interest and entitlement spending now consume 98.4% of annual government receipts.

“

The pressure is compounded by rising government spending and weakening receipts.

A key market trigger to watch is the 10-year Treasury yield crossing 5%, a level Jefferies views as a potential near-term risk for equities. While Treasury Secretary Scott Bessent's plan to increase long-term Treasury buybacks might offer some containment, underlying fiscal pressures persist. Jefferies suggests this fiscal backdrop supports gold prices, but warns that higher yield risks could make equity valuations increasingly vulnerable.

“

Going ahead, the key market trigger will be the 10-year Treasury yield crossing 5 per cent, which Jefferies sees as a potential near-term risk for equities.