Why is there so much commotion about the national debt today

The Shifting Sands of U.S. Debt: Why Higher Yields Are Here to Stay

For decades, the United States has enjoyed an unparalleled advantage in global finance: the ability to issue debt in its own currency, backed by Treasuries widely regarded as the safest asset on Earth. This “exorbitant privilege” has allowed the U.S. to borrow at remarkably low rates, even as deficits ballooned. But in 2025, the landscape is shifting. Record deficits, central banks hoarding gold, and stubbornly high long-term yields and even Russias removal from the swift, USD depreciation has contirnuted significantly to the yields today.

A Flood of Debt: Two Decades of Deficits

The U.S. hasn’t balanced its budget since 2001. Over the past two decades, annual deficits have grown from modest to massive:

• 2022–2024: Deficits remained enormous, with fiscal year 2024 hitting $1.8 trillion—the third-largest ever.

The result? A huge flood of Treasury issuance. Every year, markets must absorb more debt, pushing yields higher unless demand keeps pace.


We all hear inverted yield curve predicts recession but now the debt is doing somehting unusual 

Who’s Buying the Debt?

As of late 2024, about 30% of publicly-held U.S. Treasuries are owned by foreign investors , with the rest held by U.S. households, mutual funds, pensions, banks, insurers, and the Federal Reserve. Foreign holdings reached a record $9.1 trillion in June 2025, but the composition has shifted:

• Japan: Still the top holder at ~$1.15 trillion.

• UK: ~$0.86 trillion.

• China: Down to ~$0.76 trillion, a sharp decline from over $1.3 trillion a decade ago.

IN the early 2010s the figure was closer to 50 percent  showing maybe a lack of trust.

A Global Perspective

The U.S. relies on foreign investors more than some peers:

• United Kingdom: Foreigners hold 25–30% of gilts, similar to the U.S., with pensions and insurers playing a major role.

• Japan: Only ~11.6% of Japanese government bonds (JGBs) are foreign-owned, with domestic investors dominating.

• Türkiye: Foreign ownership collapsed to ~9–10% in 2021–22.

The U.S.’s heavy reliance on foreign capital makes its auctions and term premia more sensitive to global demand shifts.

Why the Fed Can’t Just Buy It All

Some might wonder why the Federal Reserve doesn’t simply mop up the excess debt. There are limits:

• Legal constraints: The Fed is barred from buying Treasuries directly from the Treasury in the primary market. Quantitative easing (QE) only operates in the secondary market.

• Market risks: Large-scale, permanent buying could unanchor inflation expectations and saddle the Fed with duration risk.

• Policy reality: Since 2022, the Fed has been pursuing quantitative tightening (QT), shrinking its balance sheet rather than expanding it.
  
  And if Fed is buying up more and more debt it can signal a loss of faith in the economy 

The Fed’s hands are tied, leaving markets to absorb the growing supply of Treasuries.

📉 The Longest Yield Curve Inversion in History

The U.S. yield curve has now been inverted for over two years, the longest stretch on record. Normally, long-term Treasuries yield more than short-term bills, rewarding investors for inflation and duration risk. But since mid-2022, 2-year Treasuries (~4.5%) have consistently yielded more than 10-year Treasuries (~4.1%).

• This inversion reflects deep market skepticism: investors expect weaker growth and future Fed cuts, even as the government floods the market with long-term debt 
  
  

  But as of today , the U.S. Treasury yield curve has un-inverted and is no longer in an inverted state, based on recent data. The yield curve, specifically the spread between the 10-year and 2-year Treasury yields, has returned to positive territory, meaning the 10-year Treasury yield is now higher than the 2-year yield. But the problem with this is though the fed has said it will cut rates the short term yields have not gone down long term just has gone up further faster.

The De-Dollarization Mirage and the Gold Rush

Talk of “de-dollarization” has gained traction,  Its share of global reserves has fallen from over 70% in 1999 to ~58% in 2024—still dominant.

Meanwhile, central banks are pivoting to gold:

• Gold prices hit a record $3,674 per ounce in September 2025, up 35–38% this year even outperforming bonds .

• Central banks have purchased over 1,000 metric tons annually for three years, more than double the pace of the previous decade.

• For the first time since 1996, global central banks hold more gold (27% of reserves) than U.S. Treasuries (23%).

Since more of the money that could have gone into the US treasuries are going into gold, this is causign lesser creditors to bid for the debt and hence raisign yields also. This trend can be attributed to the fear of Countries for being victims of financial weaponsation by the west. EX in 2022 Russia defaulted on its national debt as it was removed from the SWIFT even though it had aroudn 600 billion in foreign reserves

Why Long-Term Yields Won’t Budge

Even with markets anticipating a Federal Reserve rate cut of 25–50 basis points, the 10-year Treasury yield remains sticky at ~4.1–4.4%. Why?

      Term premium: There is an increase in supply of the debt and more the supply you have to give               better yields to be more attractive for buying and declining demand 

• Inflation risk: Investors demand compensation for persistent inflation concerns
  
  

  • FX-hedged returns: Investors don’t just look at the headline return from buying U.S. Treasuries, Japanese bonds, or European debt — they also check how much they’d really make after covering the currency risk. Sometimes, hedging wipes out most of the profit, sometimes it makes it more attractive. 

  • Shifting reserve preferences: Central banks and big funds used to hold mostly U.S. Treasuries as their safe asset. Now, many are mixing in more gold, euros, yuan, or even domestic bonds.

These factors keep long-term yields elevated, even if short-term rates ease.

The Ripple Effect: Mortgages and Credit

For households, the Fed’s policy rate matters less than the rates they actually pay—especially for mortgages. The math is straightforward:

• 30-year mortgage rate is equal to  10-year Treasury yield + MBS spread + lender margin.

If the 10-year yield stays high and mortgage-backed securities (MBS) spreads remain wide, mortgage rates could linger around 6–6.5%—far above the 2020–2021 lows. Similarly, banks are de-risking, and markets for asset-backed securities (ABS) and collateralised loan obligations (CLOs) are clearing at wider spreads than pre-2022. This keeps auto loans, credit cards, and corporate borrowing more expensive. 


This could also be bad for stocks and thier valuations  especially fro growing tech stocks which are valued using dcf(the value of an investment, project, or company by projecting its future cash flows and then discounting them back to their present value)

Who Wins in a High-Yield World? 

Higher yields aren’t bad for everyone. European pension funds, for instance, are reaping benefits example :

• UK defined-benefit schemes: Surpluses exceed £240 billion, with funding ratios at ~127–128%.

• Netherlands: Pension coverage ratios are ~120–123%.

These funds are eagerly locking in long-duration bonds at today’s elevated yields, providing a structural bid for sovereign debt in Europe.

Asset Side: Low yields boosted equity markets (e.g., U.S. S&P 500 rallied in 2020), but bond-heavy Dutch and UK portfolios struggled to generate adequate returns, and hedging costs rose due to low swap rates. Pension funds prefer high yield environment  as pension funds invest more in fixed income over equities due to lower percieved risk. 

High yield in US treasuries have also impacted fixed income securities and made their returns far more attractive. CLOs have given very good returns with B rated giving even 8 percent YOY. 

Higher yields and rates give rise to increasing returns in fixed income securities and even gave rise to private credit.

The Bottom Line

The U.S.’s  privilege is under strain but not over. Record deficits and a shifting investor base are pushing Treasury yields higher, with ripple effects across mortgages, consumer credit, and corporate borrowing. Central banks’ pivot to gold and a declining dollar share in reserves signal a more cautious approach to long-term Treasuries. For households and businesses, this means a world of higher borrowing costs—one that’s unlikely to change soon, even if the Fed cuts rates.

But the good news about the spedning is that The high spending by the governent is fudning huge innovation and technoloigcal advancement and growth. It is pretty much like taking loans for appreciatiing assets and cutting spedning can hamper down on innovation and growth also.