The US government's attempt to stabilise the Treasury bond market by sharply increasing its purchases of Treasury bonds has not had the desired effect. Treasury yields fell briefly after the intervention announced by Treasury Secretary Scott Bessent but soon rebounded, with the 10-year yield returning to its previous level by Friday afternoon and the 30-year bond trading near its highest level in two decades.
Rising debt costs
The rise in Treasury yields since the 2022 inflation surge has sharply increased the cost of servicing the federal debt, which has reached a record $40tn. Interest payments are set to absorb 13.5% of all federal spending this year, up from 5.2% in 2021 and exceeding defence spending.
Higher Treasury yields, which serve as a benchmark for mortgage rates and other long-term lending, have contributed to a frozen housing market and have been a factor in growing perceptions of President Donald Trump's economic stewardship. Trump has called interest rates "ridiculous" and "artificially high", blamed the Federal Reserve for not cutting them, and suggested that "the ultimate intervention is our military".
Shifting foreign holdings
The persistent weakness of Treasurys raises a broader concern for the global economy: the potential end of the era in which US government bonds served as a universally accepted safe, liquid asset. Between the turn of the century and the Great Recession, foreign central banks increased their holdings from about 20% to more than 30% of all Treasurys outstanding. By 2008, over half of all Treasury bonds were held by foreigners.
However, foreign central banks, mainly in China and Japan, have sharply pared back their holdings. Private foreign investors have picked up some of the slack, holding $7tn in Treasurys by mid-2025, almost twice the $3.9tn held by foreign official entities. Still, the foreign share of Treasury holdings has fallen by 10 percentage points over the last two decades to about 40%.
Supply and demand imbalance
Private investors, unlike foreign official entities, seek returns and will sell to make a profit, making the Treasury market more volatile. The supply of Treasury bonds has been growing rapidly to fund a budget deficit hovering at about 6% of GDP, outpacing demand. US government debt no longer holds the top rating from major credit rating agencies and must offer a higher yield than many other affluent nations.
In the Trump era, Treasurys no longer rise as they did in moments of high risk. When Trump imposed tariffs on "Liberation Day" in April last year, investors dumped Treasurys as they would a lowly emerging market bond.
Funding the deficit requires adding some $10bn a day, net, to the mountain of Treasurys on the market. Bessent will need to do more than repurchase a few billion worth of Treasurys to overcome mistrust and ensure sufficient demand to match the massive supply.
