Original authors: Zhao Ying, Li Dan
Source: Wall Street View
The U.S. government’s long-term borrowing costs are nearing historic warning levels. Two consecutive auctions of long-term Treasuries this week revealed that the compensation demanded by markets for holding U.S. long-term bonds has risen to levels rarely seen in decades, creating real pressure on the Treasury Department and the Trump administration.
On Thursday, the U.S. Treasury completed an auction of $25 billion in 30-year Treasuries, with a winning yield of 5.216%, the highest level since 2001. The auction saw a slight "tail"—the winning yield was approximately 0.4 basis points higher than the pre-auction yield, indicating that investors required a yield above the intraday market price to participate. The day before, the auction of $42 billion in 10-year Treasuries yielded a winning rate of 4.683%, the highest since the global financial crisis in 2007.
Two consecutive auctions broke multi-year records, and their market impact extended beyond the auctions themselves: the 30-year Treasury yield closed about 4 basis points lower that day, but the spread between 5-year and 30-year U.S. Treasuries widened further to its widest level since May, indicating a continued steepening of the yield curve and suggesting that long-end pressures have not dissipated due to single-day fluctuations.
Michal Stanczyk, Portfolio Manager at Allspring Global Investments’ Global Fixed Income team, said, "If investors continue to demand higher inflation and fiscal risk premiums, long-term yields could rise further, breaking above the 5% level."
Demand has not collapsed, but the structure has diverged.
The headline data from Thursday’s 30-year auction was not poor. The bid-to-cover ratio was 2.39x, above the average of 2.36x over the past six similar auctions, and absolute demand did not show a significant decline.
However, the shift in buyer structure is noteworthy. The allocation ratio for indirect bidders, reflecting demand from overseas institutions such as foreign central banks, fell to 66.8%, below the near-record high of 77.7% in July and below the average of 67.0% over the previous six auctions. Meanwhile, the allocation ratio for primary dealers rose to 11.5%, up 150 basis points from July and above the recent average of 10.6%. Since primary dealers typically act as backstops, the increase in their share, combined with the decline in indirect bidders, suggests that dealers have absorbed part of the demand gap from final investors.
The auction of 10-year Treasuries on Wednesday showed slight differences. The tail spread was more limited at 0.1 basis point, and the allocation to primary dealers declined, indicating that end investors still demonstrated some demand, though the final yield of 4.683% itself is the highest in nearly 20 years. Gennadiy Goldberg, Head of U.S. Interest Rate Strategy at TD Securities, said, "Strong absorption of supply indicates that demand is indeed present—just at a price."
Fiscal supply and term premium are dominating the long end.
This round of elevated long-term yields can no longer be explained solely by Fed policy expectations.
After the July CPI data was released, market expectations for a Fed rate hike in September have cooled, with traders now pricing in about a 35% chance of a September hike, down from around 50% earlier this week. However, 10-year and 30-year Treasury yields have not declined in line with the softer monetary policy expectations; instead, they have continued to hover near multi-year highs, and the yield curve has further steepened.
Market analysts note that persistent fiscal deficits, increasing U.S. Treasury supply, and rising term premiums are becoming independent drivers of long-term yields. Demi Hu’s team at Barclays wrote in a research report, "As the market becomes increasingly reliant on price-sensitive investors, the same level of Treasury supply may require a larger yield concession to be successfully issued."
The current U.S. debt level is approximately $31 trillion, having doubled since 2018. Fitch Ratings maintained the U.S. sovereign credit rating at "AA+" with a stable outlook on Thursday, but warned that the fiscal deficit as a share of the economy will further expand in 2026 due to tax cuts and tariff rebates. As of this fiscal year, U.S. interest expenditures have reached $1.17 trillion, a 15% increase year-over-year.
Issuance strategy under debate: Can the shortening of tenure be sustained?
Faced with long-term pressure, the Ministry of Finance quietly adjusted the wording of its quarterly borrowing policy statement last week, changing from "continuously evaluating potential increases" in the issuance of coupon-bearing and floating-rate bonds to "considering possible adjustments." The market interpreted this as the authorities leaving room for a potential reduction in long-term bond issuance.
The market generally expects that if the Treasury increases the issuance of fixed-income bonds, the focus will be on medium- to short-term instruments with maturities of 2 to 7 years, extending its existing strategy of shortening duration—authorities have already shifted issuance emphasis toward Treasury bills with maturities under one year to avoid high yields at the long end, but this has simultaneously increased refinancing risk.
John Fath, Managing Partner at BTG Pactual Asset Management US LLC, questioned the sustainability of this strategy: "I believe the only clear solution is for the U.S. government to tighten its budget. Shifting issuance to the short end can only go so far—beyond that, it becomes what I would call irresponsible."
From U.S. Treasuries to mortgages, cost pressures are being transmitted to the real economy.
The impact of rising long-term government bond yields has spread to broader economic sectors. As the benchmark for pricing in U.S. financial markets, the direction of government bond yields directly affects financing costs across various areas, including corporate bonds and residential mortgages. Last week, the average 30-year fixed-rate mortgage rate in the U.S. rose to 6.69%, the highest level since July 2025.
Matt Wrzesniewsky, Head of Fixed Income Client Portfolio Management at Vanguard, believes that today’s elevated yield levels offer investors “another opportunity to enter the market.” Vanguard expects the 10-year U.S. Treasury yield to remain in the range of 4.25% to 4.75% and favors increasing interest rate exposure through intermediate-term bonds rather than 30-year long-duration bonds.
In the short term, the successful completion of these two auctions indicates that the market still has absorption capacity. However, the very fact that 30-year Treasuries were issued at a yield of 5.216% sends a clear signal: amid rising deficits, increased supply, and persistent inflation uncertainty, the U.S. government’s long-term borrowing costs are at levels rarely seen this century. Demand trends in upcoming medium- to long-term auctions will serve as a critical indicator of whether this trend continues to intensify.