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The deteriorating fiscal standing of the US is increasingly a problem for international markets, with public debt exceeding USD 40 trillion and a widening deficit. Brokers at Jefferies suggested that higher yields on Treasury securities would increase pressure on stocks and curtail the Federal Reserve's leeway.
US public debt surpassed USD 40 trillion, with the fiscal deficit reaching USD 432 billion in July, the highest since March 2021 and a record for July. In the first 10 months of the fiscal year, the budget deficit touched USD 1.799 trillion, surpassing the total annual budget deficit of USD 1.775 trillion in FY25.
“The worsening of the fiscal situation can keep putting pressure on the rise of long-term Treasury yields,” Jefferies added. Nominal US growth was 5.9 percent over the last 12 quarters. Jefferies noted that the nominal growth above the 10-year Treasury yield suggests yields will rise.
Recently held Treasury auctions also raised concerns about future yield growth. The 10-year Treasury auction yield rose to 4.683 percent, the highest since 2007. The 30-year Treasury auction yield rose to 5.216 percent, the highest since 2001.
Jefferies identified the 10-year Treasury yield crossing 5 percent as one of the key near-term market triggers and risks for equities. Currently, the 10-year Treasury yield is at 4.69 percent, down from 4.746 percent.
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The pressure on US finances was increased by rising government expenditure coupled with poor revenue performance. Government expenditure climbed by 21.7 percent in July compared to the previous year, while receipts fell by 1.3 percent.
National defense expenditure rose by 19.9 percent in July. Meanwhile, interest and entitlement payments accounted for 98.4 percent of annualized government revenues, indicating increasing pressure on government finances.
US national debt stood at USD 40.047 trillion according to Treasury records. The amount includes USD 32.266 trillion of public debt and USD 7.782 trillion of intra-governmental debt. It took less than five months for the debt to reach this mark from USD 39 trillion.
Jefferies also pointed to the Treasury’s increasing reliance on short-term funding and interventions to support the long end of the Treasury market as a sign of monetary policy constraints.
The brokerage said the fiscal backdrop was ultimately supportive of gold, while rising Treasury yields could make equity valuations increasingly vulnerable if the 10-year yield crossed 5 percent.
Interest payments also became a major burden on the federal budget, surpassing Medicare spending in the first 10 months of fiscal 2026 to become the second-largest federal expenditure after Social Security.
