The market for Treasury securities is sending an increasingly troubling signal. As of last week, investors were demanding about 90 extra basis points in yield to compensate for the added risk of lending longer-term to the US government. In October, before the election of President Donald Trump, the 10-year term premium was close to zero.
Why the declining appetite for Treasuries? For one, yields on competing government bonds have risen: Japan’s 10-year note offers 1.5%, up from less than 1% in early October. Then there’s Trump’s trade war. Instead of appreciating, as one would expect amid rising tariffs, the dollar’s trade-weighted value has declined about 5% since the president took office in January, indicating waning foreign demand for US financial assets.
No less important is the US government’s dire and deteriorating fiscal position. The budget deficit was 23% larger in the first seven months of this year than in the same period last year. The Congressional Budget Office estimates that Trump’s “One Big Beautiful Bill Act” will add $2.3 trillion to the deficit over 10 years — and that’s based on some improbably optimistic assumptions. It’ll be much larger if there’s a recession, borrowing costs keep rising, popular tax cuts (such as on tips and overtime) are extended rather than ending in 2029, trade policies undermine productivity or immigration crackdowns curtail labor supply.
A mere 10-basis-point increase in the interest rate on US government debt would add $351 billion to the 10-year deficit. A mere 10-basis-point annual shortfall in productivity growth or labor-force growth would add $388 billion or $184 billion, respectively.
