US fiscal deterioration is emerging as a growing risk for global markets, with rising Treasury yields potentially putting pressure on equities and limiting the Federal Reserve’s room for manoeuvre, brokerage firm Jefferies said in its latest research report.The brokerage said US public debt has crossed $40 trillion, while the fiscal deficit continues to widen, creating conditions in which long-term borrowing costs could remain elevated.The US fiscal deficit rose to $432 billion in July, the highest monthly deficit since March 2021 and a record for the month.In the first 10 months of the fiscal year, the deficit reached $1.799 trillion, already exceeding the $1.775 trillion deficit recorded for the whole of FY25.Also read: US debt tops $40 trillion – $20 trillion since Trump first took officeThe annualised fiscal deficit-to-GDP ratio also rose to 6.1 per cent in July from 5.7 per cent in June, according to Jefferies.
Rising Treasury yields emerge as key market risk
Jefferies expects the worsening fiscal position to continue putting upward pressure on long-term Treasury yields.Nominal US GDP growth has averaged 5.9 per cent over the past 12 quarters, and the brokerage said nominal growth running above the 10-year Treasury yield indicates that yields should move higher.Recent Treasury auctions have also highlighted the pressure. The 10-year Treasury auction yield reached 4.683 per cent, its highest level since 2007, while the 30-year auction yield rose to 5.216 per cent, its highest since 2001.The brokerage identified the 10-year Treasury yield crossing 5 per cent as a key near-term market trigger and potential risk for equities. The yield was around 4.69 per cent after recently touching 4.746 per cent.Also read: US debt crosses $40 trillion but everyone still trusts Uncle Sam. But for how long?Treasury secretary Scott Bessent’s decision to at least double long-term Treasury buybacks could help contain the rise in yields, Jefferies said, although underlying fiscal pressures remain.
Spending rises as government receipts weaken
The pressure on US finances is being compounded by higher government spending and weaker receipts.Federal government outlays surged 21.7 per cent year-on-year in July, while receipts declined 1.3 per cent. National defence spending increased 19.9 per cent during the month.At the same time, net interest and entitlement spending rose to 98.4 per cent of annualised government receipts, highlighting the growing fiscal burden, according to the brokerage.The US national debt crossed the $40 trillion mark for the first time, with Treasury data showing the debt at $40.047 trillion, including $32.266 trillion held by the public and $7.782 trillion in intragovernmental holdings.The milestone came less than five months after US debt crossed $39 trillion.
Fiscal pressure could support gold
Jefferies also pointed to the Treasury’s increasing reliance on short-term funding and intervention to support the long end of the Treasury market as evidence of constraints facing monetary policy.The brokerage said the fiscal backdrop is ultimately supportive for gold, while rising Treasury yields could make equity valuations increasingly vulnerable if the 10-year yield breaches the 5 per cent threshold.Interest payments have also become a major burden on the federal budget, surpassing Medicare spending in the first 10 months of fiscal 2026 to become the second-largest federal expenditure after Social Security.
