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Investing.com -- Concerns about a potential debt crisis in the United States escalated after Moody’s downgraded U.S. government debt, and Japanese bond yields surged, sending a ripple through global markets.
The S&P 500 dropped 1.61%, largely driven by a poorly received 20-year Treasury auction.
Moreover, yields at the long end of the U.S. Treasury curve are rising. The 30-year bond yield surpassed 5.00% for the first time since October 2023, setting off alarm bells in the financial press.
While the 10-year yield remains below last year’s peak, the pressure is mounting, market research firm Yardeni Research cautions.
Part of the anxiety stems from the fiscal impact of President Trump’s “Big Beautiful Bill.” The national debt has climbed to a record $36.2 trillion, with $28.6 trillion in marketable securities held by the public.
The Congressional Budget Office pegs the bill’s potential cost at $2.3 trillion over the next decade, while the Committee for a Responsible Federal Budget warns it could reach $5.7 trillion if temporary tax cuts are extended.
This fiscal expansion, combined with existing tariffs, may fuel inflation, though weaker energy prices are expected to temper it. The Cleveland Fed’s Inflation Nowcasting model sees May’s headline CPI rising just 0.12% month-over-month, with core inflation at 0.23%.
Market watchers are questioning whether bond investors — the so-called Bond Vigilantes — will force the 10-year yield well above 5.00%. Such a move could signal deeper trouble.
“So is a U.S. government debt crisis imminent?” Yardeni Research asked in a recent note. “It’s possible, especially since tariffs already implemented by Trump are likely to boost inflation in coming months.”
However, there are levers policymakers can pull. The Treasury could shift more issuance toward short-term bills, a strategy dubbed “Yield Curve Control by the Treasury (YCC-T).” If necessary, the Federal Reserve could step in with renewed Quantitative Easing to stabilize markets.
A debt crisis, if it comes, may not spell disaster. As Yardeni notes, “A debt crisis need not be a calamity if it forces Washington to put U.S. fiscal policy on a credible sustainable course.”
For investors, it could even mark a long-term buying opportunity to buy stocks, the firm added.
“Fasten your seat belts,” Yardeni concluded.