During the last debt scare, the 10-year yield hit 5%, and the floodgates of demand opened. Now the debt is $6 trillion bigger; no guarantee 5% will open the floodgates again.
By Wolf Richter for WOLF STREET.
Long-term Treasury yields surged this week as the bond market got nervous about longer-term inflation prospects and edgy about the onslaught of new debt needed to fund the ballooning deficit. Huge amounts of new debt will have to be issued over the next many years to fund it all, and those securities will have to find new buyers, and the fear in the bond market is that ever more buyers will have to be enticed into the market with higher yields, and higher yields mean lower prices for existing bondholders, who’ve already been through a bloodbath since mid-2020 when the 40-year bond bull market flipped to a bond bear market as longer-term yields began to soar.
The 30-year Treasury yield jumped by 10 basis points this week to 5.16%, after briefly reaching 5.19% on Thursday intraday. These were the highest yields, along with May 19, since July 2007.
The Fed has cut its policy rates by 175 basis points since September 2024, even as inflation had started to accelerate again. And over the same period, the 30-year Treasury yield has risen by 120 basis points. The 30-year yield is now 153 basis points above the Effective Federal Funds Rate, which the Fed targets with its policy rates (EFFR, blue), after having been 140 basis points below the EFFR before the Fed’s rate cuts began in September 2024.
These rate cuts spooked the bond market. The bond market fears inflation because it eats up a big portion of the purchasing power of long bonds. It fears a dovish Fed that allows inflation to happen. And it fears the onslaught of new debt.
The two-decade chart below shows the final 14 years of the 40-year bond bull market and the first six years of the bond bear market. The 30-year Treasury yield took 14 years to zigzag down from 5.2% to 1.0% (March 2020), and then took only six years to rise back to those levels.
The market value of the 30-year Treasury securities purchased in March 2020 at the Treasury auction has dropped by over 50%. This is the bloodbath these bondholders have been through, and they fear that there’s more to come, and they’re demanding higher yields to buy these securities to be compensated for those risks.
This was trading in the secondary market. But there were two long-term Treasury auctions this week, and both were revealing of the situation: The 20-year Treasury bond auction on Wednesday and the 10-year Treasury Inflation Protected Securities (TIPS) auction on Thursday.
The 20-year Treasury bonds sold at auction on Wednesday at a yield of 5.163%. Then in the secondary market on Thursday, the 20-year yield rose to 5.20%, the highest yield since the debt scare of October 2023, which had produced the highest yield since 2007. The 20-year yield closed on Friday at 5.18%, up by 11 basis points for the week.
The debt scare of 2023 ensued after the Treasury Department had revealed just how much long-term debt it would issue over the next few quarters. That flood of projected new supply gave bond investors the willies.
During that debt scare, the 10-year yield surged relentlessly from 3.4% in May 2023 to over 5% on October 23, 2023 — 160 basis points in seven months. But 5% opened the floodgates of demand and in hours drove the yield down to 4.83%, which was quite a spectacle.
With the 10-year yield at the time, 5% was where the floodgates of demand opened, and it hasn’t hit 5% since.
That’s what happened last time there was a debt scare. There is no guarantee that the floodgates of demand will open sufficiently again when the 10-year yield hits 5% next time because by now, the debt has gotten $6 trillion bigger.
After seeing the bond market’s reaction, the Treasury Department walked back its issue plans for long-term securities to focus more on shorter-term maturities and T-bills. And it’s treading carefully to this day about long-term issuance. The 10-year yield going over 5% was a scary moment for the Treasury Department.
But back then, the government didn’t have to actually sell 10-year Treasuries at 5%. The last 10-year note auction before October 23, 2023, was on October 11, and $35 billion of 10-year notes were sold at a yield of 4.61%. And the first auction after the debt scare came on November 8, and the $40 billion of 10-year notes went through the auction at 4.519%.
The last time when it took 5%+ to sell 10-year notes at auction was in June 2007. But at the time, the Treasury Department only had to sell $8-12 billion of 10-year notes per auction, and there were only 8 auctions per year. Now there are 12 auctions per year, and each is running in the $40-$50 billion range.
So the 10-year Treasury yield rose to 4.71% on Thursday, the highest since the three days in January 2025, and beyond that, the highest since the debt scare in October 2023, and beyond that the highest since 2007.
Note how the 10-year yield spiked to 5% in October 2023 during the debt scare (circled), and how blistering demand pushed it back down below 4% two months later.
The 10-year TIPS sold at auction on Thursday at a yield of 2.438%. TIPS holders also get the inflation compensation based on CPI that changes every month with CPI, which is added to the principal, and the principal grows with CPI, while the coupon interest payments are paid on the combined amount of original principal and the accumulated inflation protection, and so the interest payments rise.
In the secondary market, the 10-year TIPS yield closed on Friday at 2.43%. Those were the highest yields since the debt scare in October 2023, which was a few basis points higher, and beyond that, the highest yields since 2008.
The bond market – given the inflation dynamics, the massive flood of new debt that has to be absorbed, and the bloodbath it has already been through – remains remarkably sanguine still. It’s just squiggling a little. It hasn’t thrown a major hissy fit yet. So this would be a good time for Congress to sit up straight and start paying attention and act when there isn’t a crisis on hand. But it won’t sit up straight and pay attention until there’s a crisis on hand, like there was in the 1980s. And then the whole thing gets a lot more difficult to manage.
In case you missed it: Fed Chair Warsh scuttled forward guidance, markets are on their own. However this comes out, it promises to be a rougher ride, but in a fresh breeze: Bond Market Just Flipped to “Rate Hike in July” as 2-Month Treasury Yield Spiked by 13 Basis Points
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How will new-issue investment-grade municipal bonds be affected? I understand that they generally track the 10-year treasury rate.
Let’s go 10% plus interest rates.
Would love to see the chaos that ensues.
“Because some men aren’t looking for anything logical, like money. They can’t be bought, bullied, reasoned or negotiated with. Some men just want to watch the world burn.”
I’m in favor of higher interest rates too, within reason. But I also don’t want to have to live in a debt-soaked society that suddenly has to deal with 20% unemployment and all the desperation that would follow.
I think there has to be a middle ground where greed and stupidity get punished (looking at you, private equity/credit bubble) but we aren’t collectively flung over a cliff. I wish I knew what that number was. I’m pretty sure it’s bigger than 5% but smaller than 10% if we’re talking about the 10-year T-note and mortgage rates.
I wish there was a way to recommend posts here. You nailed it.
Reticent Herd Animal-
Good comment.
Just curious as to your reasoning for 10% is an upper bound. The prior bond BEAR market from 1940 to 1980 relentlessly lifted rates up to nearly 20% (with accompanying unemployment). And that period began with US debt-to-GDP in the neighborhood of today’s.
Not saying your opinion is wrong…instead maybe looking for justification for a hope that the current cycle won’t match that cycle.
Give this man a cigar and a fed governor seat.
That’s where I’m at. You need to pay me at least 10% to have any confidence in a 30 year US Treasury given all the profligacy being demonstrated by this administration. You can fool some of the people all of the time, but you can’t fool me. Too much criminality and self dealing going on to have faith in these guys. They are con men and thieves.
Congress can cut “this administration” off anytime it chooses.
You’re barking up the wrong tree.
They could also choose to issue money directly, rather than taking on more debt. It might cause inflation, but we’re going to get that anyway.
The looting will continue until the elite move to another continent.
Because they can.
Because they have no fear of backlash legally.
Because they have no concept of moral behavior.
Because most of the subjects are illiterate of basic math much less economics.
Because fiat collapses without infinite growth.
As you said Trucker, the parasites will kill the host and then slither along their way.
These interest rates are still being repressed. There is nothing “Free” in a “Free Market.” From Yahoo finance Dec. 10, 2025:
“WASHINGTON, Dec 10 (Reuters) – The Federal Reserve on Wednesday said it would imminently start buying short-dated government bonds to help manage market liquidity levels to ensure the central bank retains firm control over its interest rate target system.
The technically oriented purchases will commence on Friday, the central bank said as part of the policy announcement associated with its latest Federal Open Market Committee meeting. When it begins buying, the initial round will total around $40 billion in Treasury bills per month.”
Outdated. Have you been asleep? That was a 4-month burst that’s finished. In mid-April, they tapered them, and they have been at $10 billion a month in June and July. $10 billion a month is so little on their $6.7 trillion balance sheet that you can barely even see it (see first chart below).
The Fed’s balance sheet always grew before 2008 with the economy, and before QE, it HAD to grow with the economy because of its liabilities currency in circulation and reserves, that was the normal condition (see second chart below, which shows the balance sheet before 2008 before QE). This normal growth of the balance sheet has ZERO to do with QE but is a function of demand for currency in circulation through the banking system (getting $100 out of an ATM) and a function of reserves (banks pay each other through their reserve accounts, $ trillions a day flow through those, and so there is always a balance, and the more and the bigger the transactions, the bigger the balance, like your checking account. These are liabilities on the balance sheet, and they MUST be counterbalanced by assets (it’s called a “balance sheet for a reason because assets = liabilities + capital… ALWAYS on every financial statement in the corporate world.
The Fed is still shedding its long-term MBS at a rate of about $16 billion a month, so that’s long-term debt that they’re shedding and replacing with short-term T-bills, which is a “reverse operation twist” which pushes up long-term rates (see third chart below).
The Fed’s balance sheet always grew. This is before 2008:
It continues to shed its MBS:
Abstaining the tax cuts and restraining the QE is is the most formidable and easiest approach to flow stability in bond market.
Instead of issuing new debt, rollover the expiring existing short term debt towards stablecoins demand.
“before QE, it HAD to grow with the economy”
Indeed
But it seems since 2009 the balance sheet grew to pump the economy / markets rather than “grow with it”.
Yes, QE starting in 2008 screwed up everything. Bernanke did it. They thought they could get away with it. But they didn’t. Now we have a major inflation problem for the first time in 40 years, and it’s not going back into the bottle.
Indeed Bernanke …. and a Noble Prize
Let me print several Trillion and I’ll make things look good too….
for a while
“Sometimes fallin’ feels like flyin’…….for a little while” T Bone Burnett
Wolf, your description of the recent history of the 10-year yield was masterful! We’re lucky you have this skill… and share it.
In 1976, the treasurer of Armstrong World Industries told me the country would not survive 10% interest rates. They went to 22% and we survived. We are in a mess now because of the tax breaks passed in 2016 and renewed in 2025 and Bernankes ZIRP and QE farce. The GOP has once again sent us down the rabbit hole. When will this country ever learn?
Nonsense!
As an always NPA and always voter since 1966, I can testify at this point that it should be SO clear to everyone that is not a puppet, that BOTH, of the so called political ”parties” are really just both sides of the very very same Uni-Party coin, doing exactly the very same damage to working folx and retired folx.
To think otherwise is to be a product of the vast continuing propaganda of the oligarchy trying, and succeeding so far, to keep the vast majority of folx around the world in subjugation SSOOOO similar to what the ”lords and ladies” of the royalty/nobility had and have done for eva.
That’s exactly why BOTH parties are trying to get rid of Luna and others who are at least trying to represent in interests of their constituents instead of just lining their own pockets…
I have been trying to decide just how high the 30 year would have to yield before I would consider buying it. I cannot come up with a number because it is clear that this administration and congress doesn’t care in the slightest about fiscal discipline so debt is going to continue to go insane. The administration has also made it clear it doesn’t care about inflation. Furthermore, it is equally clear that the FED is going really slow in acknowledging inflation. They are looking for every reason to ignore it or at least delay in dealing with it.
I mean I seriously cannot put a number on it. Even if the 30 year yielded 10% I don’t think I would buy. Just too much inflation uncertainty with no lne taking it seriously.
Agree totally JimL:
While keeping as low a profile as possible, mainly in the 4 week T-bill,,, I keep trying to figure out that exact question.
Maybe start with the long term at low $$ in??
Can’t even get there, yet.
Until and unless the politicians stop lining their own pockets with massive insider trading, etc., and start facing economic realities of the vast debt,,, no ”rational” decisions are possible.
What do you believe is the likelihood of Congress failing to sit up, the Fed failing to raise rates but instead buying the bonds that no one else wants to keep long term rates down?
Very thorough source of information on the relationship between rate increases and debt.
It would be comforting to see officials do what is right for the population and country.
Remember this quote? “ask not what your country can do for you–ask what you can do for your country. My fellow citizens of the world: ask not what America will do for you, but what together we can do for the freedom of man.”
So many in govt are simply out for themselves and personal interests. At the same time Kennedy made that inspiring often quoted speech “the president proposed in 1963 to cut income taxes from a range of 20-91% to 14-65% He also proposed a cut in the corporate tax rate from 52% to 47%.”
And on and on to where it is now. One day 40 trillion chickens will come home to roost in the money tree.
Every where a future of financial repression, similar to that applied post WW2, is appearing to be a possibility.
But inflation will explode and the dollar will plunge if they do that, and so they won’t do that, because no one at the top of industry and government wants inflation to explode and the dollar to plunge.
Even Japan was forced by inflation and the plunging currency to give up YYC and QE and hike policy rates and shift to substantial QT:
https://wolfstreet.com/2026/07/03/qt-instead-of-rate-hikes-to-put-a-floor-under-plunging-yen-bank-of-japan-sheds-15-6-of-its-massive-assets/
It could happen the other way where inflation explodes and the dollar plunges first…
Were those charts taken from the Federal Reserve website or did you download the data to an excel spreadsheet and create your own graphs?
I remember the 80s. I bought 10% municipal bonds. It felt good even though I was probably being killed by inflation. Now I’m old enough that I just need a return that does not lag inflation by too much and survive the coming AI bubble bust and $200 oil. I recently bought a Bolt EV with my neighborhood gas at $6/gallon. I should have put solar on my roof. Maybe it is still not too late, though at my age (74) the return may not be good.
At your age, and mine, it’s more about convenience and less about return.
If you want it, get it!
No worries about oil.
It will never ever reach $200.
$120 tops and very temporary as well as the world would cease to function at levels above that very long.
4% inflation
5% ten year
which one is out of whack?
Both
too soon to tell…the numbers are going to shift around..bond mkt volatility for a while. traders can make use of this moment. FOMC under new leadership has yet to do anything. They have tools that may be more effective than they know…..doing something would send a strong message. doing nothing would be a very poor message…. these analyst “groups” that WARSH describes seem to have been enlisted at an inopportune time …interesting he didnt want to get more comfortable w processes and people before doing this. doesnt he trust himself and the excellent staff? I’ve worked in settings where they pull in task groups. Much ado for negligible results.. usually the answers w the necessary/ excellent analysis is right in front of you.
So now what? A long time ago I was in Brazil and cashed 100 US dollars for Brazilian money at the bank. They gave me a two(2) foot stack of 10,000 denominated notes. The same type of thing happened in Chile a few years later. Is this the USA in a few years?
These countries still operated because everyone kept there savings in foreign currency or gold. So much so, that when I sold my dollars the next time at the street value I got a lot more Brazilian or Chilean money.
Both these countries retired their currencies and started new one. Both countries tried Socialism. Perhaps they learned what we are about to learn, and are better off today