US long-term borrowing costs hit 25-year high on fiscal fears

The US Treasury sold $25 billion of 30-year bonds at a yield of 5.216% on Thursday, the highest since 2001, as investors demanded greater compensation for fiscal deficits and inflation risk.

"If investors continue to demand higher compensation for inflation and fiscal risk premiums, long-end yields could push even higher, breaking through the 5% threshold," said Michal Stanczyk, portfolio manager on Allspring Global Investments' global fixed income team.

The auction followed a $42 billion sale of 10-year notes at 4.683%, the highest since 2007. The 30-year yield closed about 4 basis points lower on the day, but the spread between 5-year and 30-year yields widened to its widest since May, with the curve continuing to steepen.

US interest expenses have reached $1.17 trillion this fiscal year, up 15 percent year over year, while national debt stands near $31 trillion. With the Treasury weighing a shift toward shorter-dated issuance and the Fed's September meeting approaching, upcoming medium- and long-dated auctions will determine whether long-end yields break through 5 percent.

The headline numbers from Thursday's auction were not weak. The bid-to-cover ratio came in at 2.39 times, above the 2.36 times average of the previous six comparable sales. But the buyer mix shifted: indirect bidders, which include foreign central banks, took 66.8 percent of the paper, down from July's near-record 77.7 percent, while primary dealers absorbed 11.5 percent, up 150 basis points from July. Because dealers typically act as buyers of last resort, their larger share suggests some end-investor demand was backstopped.

Wednesday's 10-year sale painted a slightly different picture, with a more limited tail and lower dealer allocations, indicating end investors retained capacity to absorb supply. "The strong absorption of supply suggests demand is indeed there — it just has its price," said Gennadiy Goldberg, head of US rates strategy at TD Securities.

Fiscal Supply and Term Premiums Drive the Long End

Long-end yields have decoupled from monetary policy expectations. After the July CPI report, traders priced roughly a 35 percent probability of a September Fed hike, down from about 50 percent earlier in the week, yet 10-year and 30-year yields held near multi-year highs and the curve steepened further.

Market analysts point to widening fiscal deficits, increased Treasury supply, and rising term premiums as independent drivers. "As the market relies more heavily on price-sensitive investors, the same amount of Treasury supply may require larger yield concessions to complete issuance," wrote a Barclays team led by Demi Hu. Fitch Ratings affirmed the US sovereign rating at AA+ with a stable outlook Thursday but warned the 2026 fiscal deficit would widen further on tax cuts and tariff rebates.

The last time 30-year yields traded near these levels was August 2001, when the Treasury halted issuance of the tenor for about five years afterward. US federal debt held by the public has since surpassed the size of gross domestic product, and the Congressional Budget Office projects it will exceed 106 percent of GDP before 2030, breaking the post-World War II record.

Issuance Strategy Debate and Real-Economy Transmission

The Treasury quietly adjusted language in its quarterly refunding statement last week, changing "expects to keep coupon and floating rate note auction sizes unchanged" to "expects to consider adjustments over the next few quarters," a shift the market reads as room to cut long-dated issuance. Expectations center on concentrating new debt in 2- to 7-year tenors, extending an existing tilt toward short-term bills that raises refinancing risk.

"I think the only clear solution is for the US government to tighten its budget," said John Fath, managing partner at BTG Pactual Asset Management US LLC. "Concentrating issuance at the short end can only go so far; beyond that, it becomes what I would call irresponsible."

The rise in long-term yields has already reached the real economy. The average 30-year fixed-rate mortgage climbed to 6.69 percent last week, the highest since July 2025, pressuring corporate and household financing costs. Vanguard's Matt Wrzesniewsky, head of fixed income client portfolio management, said current levels offer "another entry opportunity," with the firm expecting 10-year yields to stay within 4.25 percent to 4.75 percent and preferring intermediate tenors over 30-year bonds.

Some investors are positioning for a reversal. Ninety One portfolio manager Jason Borbora-Sheen has built a "butterfly" trade — long 2-year and 30-year Treasuries, short 10-year notes — betting that cooling inflation restores the Fed's credibility. Goldman Sachs' Robert Kaplan noted inflation is being pulled by opposing forces, from AI infrastructure buildout and tariffs to the disinflationary deployment of AI, and stressed data dependence. The Jackson Hole symposium later this month offers Fed Chair Kevin Warsh a window to rebuild market trust.

This article is for informational purposes only and does not constitute investment advice.