US debt crosses $40 trillion as Jefferies flags Treasury yield risks

The United States’ worsening fiscal position is emerging as a significant risk for global financial markets, with federal debt crossing $40 trillion and persistent budget deficits threatening to keep long-term Treasury yields elevated, according to Jefferies. In its latest research report, the global brokerage highlighted the rapid deterioration in US government finances and warned that rising borrowing costs could have wider consequences for equities and monetary policy. Market concerns have intensified as investors demand greater returns for holding longer-dated US government debt.

Deficit climbs sharply

Jefferies noted that the US recorded a fiscal deficit of $432 billion in July, the largest monthly shortfall since March 2021 and the highest ever recorded for the month.

For the first 10 months of the fiscal year, the deficit reached $1.799 trillion, already surpassing the $1.775 trillion deficit recorded for the whole of FY25. The annualised fiscal deficit-to-GDP ratio increased to 6.1 per cent in July from 5.7 per cent in June.

The deterioration comes as federal debt has moved beyond the $40 trillion mark, increasing concerns about how much additional borrowing financial markets will have to absorb and the cost at which Washington can continue financing its obligations.

Recent Treasury auctions have reflected those pressures. The yield on a 10-year Treasury auction climbed to 4.683 per cent, its highest in 19 years, while a 30-year bond auction produced a yield of 5.216 per cent, the highest in 25 years.

Five per cent seen as key threshold

Jefferies strategist Christopher Wood has identified the 5 per cent level on the 10-year Treasury yield as an important risk threshold for equity markets. A sustained move towards or beyond that level could increase volatility and put pressure on stock valuations.

Higher government bond yields can make equities comparatively less attractive while also raising borrowing costs across the economy. The effects can extend to corporate financing, mortgages and other forms of credit, potentially weighing on investment and economic activity.

The problem is compounded by the scale of Washington's refinancing requirements. Persistently large deficits mean the Treasury must continue issuing substantial quantities of debt even as investors demand greater compensation for inflation and longer-term fiscal risks.

Despite the pressure, recent auctions do not indicate that investors are abandoning US government securities. Demand remains significant, including from institutional and overseas buyers, but investors are requiring higher yields to absorb the growing supply.

Fed faces difficult balance

The fiscal situation could also complicate the Federal Reserve's policy choices. Higher long-term yields tighten financial conditions even without an increase in the central bank's benchmark interest rate.

At the same time, inflationary pressures can restrict the Fed's ability to respond to financial-market weakness through aggressive monetary easing. Large government debt-servicing requirements add another layer of sensitivity because sustained high rates translate into higher interest expenses for Washington.

Jefferies' assessment underscores a broader concern confronting global investors: the combination of enormous US borrowing requirements, stubborn fiscal deficits and elevated bond yields could increasingly influence asset prices well beyond the American market.

With US Treasuries serving as a benchmark for borrowing costs globally, a sustained rise in yields can reverberate through currencies, equities and debt markets worldwide. The $40 trillion debt milestone, therefore, represents more than a headline number, with investors increasingly focused on whether Washington can stabilise its fiscal trajectory without triggering further pressure in bond markets.