US Fiscal Deterioration Threatens Global Markets, Says Jefferies

The US fiscal situation has become increasingly precarious for global markets, with higher Treasury yields potentially putting pressure on equities and limiting the Federal Reserve's policy flexibility, according to a recent research report by Jefferies.

The US public debt has surpassed $40 trillion, while the fiscal deficit continues to widen, creating an environment where long-term borrowing costs could remain elevated. The July monthly deficit reached $432 billion, the highest since March 2021 and a record for the month, with the first 10 months of the fiscal year already exceeding the full-year FY25 deficit of $1.775 trillion.

Nominal US GDP growth has averaged 5.9% over the past 12 quarters, and Jefferies argues that nominal growth running above the 10-year Treasury yield is a signal that yields should move higher. Recent auctions have shown the pressure: the 10-year Treasury auction yield reached 4.683%, its highest since 2007, while the 30-year auction yield climbed to 5.216%, its highest since 2001.

The key market trigger will be the 10-year Treasury yield crossing 5% which Jefferies sees as a potential near-term risk for equities. The Treasury Secretary's decision to at least double long-term Treasury buybacks could help contain the rise, but the underlying fiscal pressures remain.