The cost for the U.S. government to borrow money hit its highest level since 2007 on Tuesday, the latest in a worrisome series of developments that have rattled global markets and American consumers alike.
The sell-off in U.S. Treasury securities — at $31 trillion the world’s largest financial market — comes amid surging public debt in the United States, Europe, Japan and Canada; renewed conflict in the Middle East; and uncertainty about the Federal Reserve’s intentions.
The rise in long-term Treasury yields creates another headwind for the U.S. economy, one that will lift borrowing costs for businesses and consumers as well as official Washington.
The yield, or return, on the 30-year Treasury topped 5.3 percent in early-morning trading Tuesday, marking a dramatic break from the easy-money conditions of the pre-pandemic years, when it dipped as low as 1 percent.
Much of the bond market’s unsettling tumult results from basic supply and demand. As governments and corporations jostle for the pool of available investment capital, they are driving the cost of borrowed money higher. Political leaders in the U.S., Europe and Japan must fund ambitious public spending plans, while hyperscalers such as Alphabet and Microsoft need money to build their artificial intelligence networks.
At the same time, the collapse of the fragile U.S.-Iran ceasefire has reignited fears that an interruption in Persian Gulf oil supplies will keep energy costs and inflation high. On Thursday, Brent crude, the global oil benchmark, neared $88 per barrel, up from around $72 during the recent pause in hostilities.
“There’s a global competition for capital, which is government and private,” said Priya Misra, a bond fund manager for J.P. Morgan Asset Management in New York. “This is going to be a huge problem for the equity market because I think people are not convinced that the entire economy can handle this level of real rates.”
On Wall Street, stocks over the past year have ridden robust earnings, and AI fever, to a gain of nearly 20 percent. But higher real, or inflation-adjusted, borrowing costs are likely to slow economic activity. On Tuesday, the S&P 500 index, a broad market measure, dipped more than half a percentage point. The tech-heavy Nasdaq lost more than 1 percent.
Between April and June, the economy grew at an annual rate of just 1.5 percent. Fresh signs of weakness appeared Tuesday as the Census Bureau said that single-family housing starts in July fell almost 10 percent from the previous month, reaching their lowest level in nearly four years.
The housing industry will be among the first to feel the bond market’s sting. The average cost of a fixed-rate 30-year mortgage, which is influenced by long-term Treasury yields, stands at 6.67 percent, its highest point in a year, and could be headed higher.
Some investors grumble that the Federal Reserve, which controls short-term borrowing costs, has contributed to the bond market angst. Chair Kevin Warsh is trying to wean financial markets off what he sees as excessive hand-holding by the central bank. His public utterances on inflation and the economy have been parsimonious compared with those of recent predecessors.
Warsh wants financial players to react to real-world developments, not invest based on assumptions about what the Fed will do. But with annual inflation of 3.7 percent, well above the Fed’s 2 percent target, some investors say that Warsh’s tight-lipped approach has left them uncertain about what would lead him to back an increase in the Fed’s benchmark lending rate.
Inflation, which erodes the value of existing bonds relative to new ones, is kryptonite to bond investors. Recent economic data on consumer prices and payrolls suggested that inflation may have peaked, which would be good news for bonds. But not knowing how the Fed will respond to changing conditions leaves some uneasy.
“Economic data would matter if you understood how the Fed would respond. And I think there’s some genuine questions here,” Misra said.
With continued uncertainty shadowing the U.S.-Iran conflict, energy markets remain on edge. The national average gasoline price stands at $4.06 a gallon and has motorists fuming less than three months before the November congressional elections.
Still, investor measures of inflation remain largely calm. And Warsh will get a chance to reassure financial markets on Aug. 28, when he addresses the annual Fed conference at Jackson Hole, Wyoming.
The increase in the 30-year yield, up almost half a percentage point since late June, has been noteworthy, but it’s not unprecedented. There were deeper sell-offs in 2022 and 2023.
“As yet, this is not a bond market crisis,” economists at Capital Economics in London told investors Tuesday.
Still, a sustained increase in the yield eventually filters into higher rates on consumer loans for homes and autos as well as corporate lending to finance factories and hiring.
The government doesn’t immediately feel the full force of higher borrowing costs. But if rates remain elevated, it will pay more for the new bonds that it issues as old securities mature and are retired.
For the federal government, higher borrowing costs are spectacularly ill-timed. With a national debt of nearly $40 trillion, Washington this year is expected to spend more than $1 trillion on interest. That’s roughly what taxpayers spend on Medicare each year, according to the Congressional Budget Office.
If long-term Treasury yields stayed half a percentage point higher than current budget projections assume, the government’s annual interest bill could swell by roughly $95 billion by 2028, an April CBO analysis suggests.
The U.S. is not alone in seeing government bond yields tick higher as spending plans collide with market reality. Investors are demanding greater compensation from governments in Germany, where officials last year eased a constitutional “debt brake” to allow for a sizable defense spending increase, and in Japan, where Prime Minister Sanae Takaichi is spearheading a $135 billion stimulus program.
Yields on Japanese 30-year bonds, which paid investors less than 1 percent in 2022, now hover at 4.1 percent, near an all-time high.
One factor in the U.S. run-up “has to do with contagion from the global market, if you look at [Japanese bonds] in particular moving higher,” said Eric Winograd, director of developed market economic research for AllianceBernstein in New York.
The profile of Treasury investors has also changed in ways that could trigger faster market reactions, as quick-draw hedge funds have supplanted traditional investors such as central banks, pension funds and insurance companies. Between 2023 and September 2025, hedge funds nearly doubled their Treasury holdings and now own 8.5 percent of the market, more than the top three sovereign investors — Japan, Britain and China — combined.
Hedge funds own more Treasurys than do mutual funds or U.S. banks, according to a Federal Reserve analysis.
Unlike traditional investors, hedge funds move in and out of positions on a rapid-fire basis, raising the prospect of “systemic stress” in the world’s most important financial market, the Fed concluded.
“You need players to be willing to buy the extra debt. Those players tend to be private-sector players, hedge funds, and those players are much more sensitive to risk than the official sector,” said Marcello Estevao, chief economist of the Institute of International Finance, an industry group.
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