Government Debt Yields Surging Amid Budget Deficit Fears and Inflation Concerns

Treasury yields have been rising at an inopportune time due to several factors. The U.S. government debt load is nearing $40 trillion, with a budget shortfall of $432.3 billion in July and a projected deficit of over $2 trillion for the full year ending September 30.

The public portion of the total government debt is set to hit 100% of GDP soon, which has raised concerns among fixed income investors about the sustainability of the debt burden. This, combined with inflation holding steady above the Federal Reserve's 2% target and a surge in corporate bond issuance competing for investors' attention, has pushed up financing costs.

According to Barclays Capital, head of U.S. rates research Anshul Pradhan notes that while these pressures are not new, their strength is now overwhelming individual soft-data releases. The 30-year bond yield has jumped over 40 basis points since the late June low, with yields rising even though the Fed has kept its benchmark rate steady in a range between 3.50%-3.75% all year.

Ed Yardeni, head of Yardeni Associates, suggests that investors are testing the limits of the 'bond vigilantes,' who protest poor fiscal conditions by withholding investment. He views the current rise in yields as a vote of confidence in the strength of the economy.