The US government sold 30-year bonds at 5.22%, the highest interest rate in a quarter of a century, marking a significant milestone in government borrowing costs. The $25 billion sale on Thursday came in at 5.22%, the most since 2001, even as a drop in oil prices supported US debt in secondary-market trading. The sale, which was met with decent demand, follows the Treasury Department's 10-year auction a day earlier that drew the highest financing cost at that tenor since 2007. The bid-to-cover ratio was 2.39, in line with the 2.36 average for the past six comparable auctions, as reported by CNBC TV18. This represents a headache for President Donald Trump and Treasury Secretary Scott Bessent ahead of midterm elections in November, as lofty government financing costs are already feeding through to the broader economy after years of elevated inflation and government spending.
The 10-year Treasury yield has risen above 4.6%, with its three-month correlation with the S&P 500 turning negative, according to LPL Research analysis. This correlation flip suggests that stocks and yields are moving in opposite directions, with higher yields increasingly representing a valuation and liquidity constraint for equities. When the 10-year Treasury yield rises in a sustained move above the 4.3% range, the three-month weekly correlation with the S&P 500 flips negative, as shown by LPL Research data. Materials, real estate, and developed market stocks are most negatively correlated to rising Treasury yields, while energy companies and crude oil futures could be relative outperformers in a breakout higher scenario.
US debt interest has cost $1.17 trillion since October, surpassing national defense spending of $804 billion, marking a significant shift in government priorities, as reported by Bloomberg. The net interest figure reaches $931 billion when adjusted for government trust fund payments, making it the third-largest government expense after Social Security and Medicare. This represents a dramatic acceleration from fiscal 2024, when the gap was $123 billion for the full year, compared to $127 billion after just 10 months in the current fiscal year. The total US debt reached $39.89 trillion on August 10, with only $108 billion remaining before crossing the $40 trillion threshold, according to the Joint Economic Committee. For the fiscal year to date, the tally is $1.17 trillion — a 15% increase, thanks in part to higher yields on Treasuries.
Long-term yields surged past 5% this year on investor concerns that a rise in energy prices will boost cost pressures, forcing the Federal Reserve to keep interest rates elevated for years to come. That's on top of heightened Treasury supply from years of fiscal deficits, a sudden ramp-up of corporate borrowing to fund the artificial-intelligence boom, and waning demand from traditional buyers of long-dated bonds. On Thursday, yields were lower by two to three basis points across maturities as a reading of US producer prices offered further evidence that inflationary pressures are easing. Traders pared back their expectations for a Fed rate hike in September to reflect about a 35% of a move, from roughly 50% earlier this week. Consumer inflation eased in July, with the Consumer Price Index rising 3.4% over the year and core inflation cooling to 2.5%, providing the Federal Reserve with encouraging data to remain patient on interest rate decisions.
Despite an in-line CPI reading and a slightly weaker PPI reading, 10-year rates are flat for the week, while 30-year rates are actually up 2 basis points, as reported by Investing.com. This development suggests that the recent rise in rates is about more than just inflation concerns, potentially reflecting the normalization of the yield curve given that it seems pretty clear at this point that the rate-cutting cycle is over. The spread between 10-year and 30-year rates remains at just 50 basis points, which appears too narrow given historical context. The more interesting development is that the 10-year real yield is now higher than the 10-year breakeven inflation rate, with higher real rates doing some of the heavy lifting for the Fed by tightening financial conditions and putting downward pressure on inflation. Judging by the strength in gold and most risk assets, it would seem that real rates are still not restrictive enough, suggesting that any further increase in real yields would likely require a higher nominal 10-year Treasury rate.
U.S. interest-rate futures on Tuesday priced in a 48% probability of a rate hike at the Federal Reserve's September meeting, down from 52.2% on Monday, according to Reuters calculations. Following the inflation data release, markets further reduced rate-hike expectations, with swap markets implying a roughly 40% chance of a September rate hike. The three-year yield declined 1.5 basis points to 4.291%, with the sector having risen roughly 11 basis points since the previous auction. The two-year yield has traded above the fed funds rate, suggesting that fixed income markets expect policymakers to at least stick to "higher for longer" policy. As per Bloomberg, all Fed meetings in the near future will need to price in the possibility of a surprise, with attention now shifting to the next round of monthly inflation and employment reports for August.
Bitcoin (BTC) traded near $63,502 on Thursday, down 0.2% in 24 hours, roughly 49% below its October 2025 peak, as reported by Bloomberg. The cryptocurrency's decline reflects the appeal of safe government bonds now paying 4.68% with almost no default risk, making volatile assets less attractive to investors. Gold climbed after CPI while Bitcoin did not, though both assets are sold against the same fiscal backdrop. The 30-year Treasury yield closed at 5.24%, clearing the 2023 peak of 5.04% and the 2025 peak of 4.97%, with yields last sitting this high in 2007. The Fed's July hold at 3.50% to 3.75% pushed long yields higher rather than calming them, with the pattern being global as bond yields climb worldwide to their highest since 2008. September's Fed meeting remains the next test for whether the $40 trillion debt milestone will shift market calculations on risk assets.
