Why are markets so concerned about US debt reaching 40 trillion USD?

What happens when the world's safest asset stops feeling safe? As US national debt races past 40 trillion USD, investors are demanding sharply higher compensation to hold long-term government bonds, pushing the 30-year Treasury yield to its highest level since 2007.

US government debt has surpassed 40 trillion USD, attracting widespread attention. However, the debt size alone is not the greatest concern. What matters more is the cost the government must pay to finance its next round of borrowing.

The clearest evidence is the recent rise in the 30-year US Treasury yield to approximately 5.34%, its highest level since 2007. This indicates that investors are demanding greater compensation for fiscal uncertainty, rising bond supply, and inflation risks.

The core problem is that large budget deficits have driven Treasury issuance higher faster than market liquidity can absorb. Meanwhile, de-dollarisation and reserve diversification by some countries have raised concerns that long-term demand may weaken. Elevated oil prices and sticky inflation have compounded this pressure, reinforcing expectations that interest rates will remain higher for longer, pushing up the term premium.

Persistently high yields could increase interest expenses and widen the deficit further.

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Can Treasury buybacks solve the problem?

Following the surge in long-term yields, the US Treasury doubled its liquidity-support buybacks for securities with remaining maturities of 10–30 years, raising the amount from a maximum of 2 billion USD to at least 4 billion USD per operation from 9 September, as per the US Treasury.

Although markets viewed the move as support for long-term bonds, the Treasury did not announce a formal yield target. Its primary objective is to purchase older, less liquid securities and improve market functioning.

However, buybacks do not reduce total debt because the government continues to run deficits and must finance these purchases with cash or new borrowing. If long-term bonds are repurchased using funds raised through bills or shorter-dated securities, the operation resembles debt-maturity switching.

This reduces the amount of long-duration debt the market must absorb but increases refinancing risk because short-term debt matures more frequently. It is also different from Fed QE, as the Treasury does not create bank reserves and the Fed’s balance sheet does not necessarily expand.

Buybacks can therefore improve liquidity and provide short-term relief, but they cannot correct structural deficits or restore debt sustainability. It is essentially just kicking the can down the road.

Summary:

Treasury buybacks help ease pressure on the 30-year Treasury yield by improving liquidity, but they don't reduce the underlying US national debt. At best, they buy time rather than fix the structural deficit driving it.

The real problem: The debt–interest spiral

Federal government interest payments have surged past 1.2 trillion USD, illustrating how the debt-interest spiral has accelerated sharply since 2020. (Source: Federal Reserve Bank of St. Louis, "Federal government current expenditures: Interest payments," accessed 24 Aug 2026).

The greater concern is the feedback loop between rising debt and interest expenses.

As the government runs deficits, it must issue more bonds. Greater supply can push yields higher, while higher borrowing costs gradually raise interest expenses as existing debt matures and is refinanced.

Higher debt → rising interest expenses → wider deficits → greater issuance → higher yields → further increases in interest expenses

The effect is gradual because much of the existing debt carries fixed interest rates. Nevertheless, the longer yields remain elevated, the more expensive refinancing becomes.

The CBO projects a fiscal deficit of approximately 1.9 trillion USD in 2026. Net interest expenses could rise from around 1.0 trillion USD in 2026 to 2.1 trillion USD in 2036, while publicly held debt could increase from 101% to 120% of GDP.

Rising interest costs crowd out public spending and reduce fiscal space for future crises. If the Fed prioritises government borrowing costs over inflation, fiscal-dominance risks could weaken confidence in monetary policy and the US dollar.

Summary:

Rising US national debt fuels a debt-interest spiral, where higher issuance pushes yields up, and interest costs climb in turn. This feedback loop is the deeper concern behind the 40 trillion USD milestone, not the headline number itself.

Higher Treasury yields or a weaker US dollar?

The US faces an increasingly difficult policy trade-off.

Allowing long-term yields to remain elevated may help the market absorb rising Treasury supply, but at the cost of higher interest expenses, tighter financial conditions and weaker economic growth. Treasury yields serve as benchmarks for mortgages, corporate bonds and other long-term loans, meaning the effects could spread throughout the economy and pressure equity valuations.

Higher yields may initially support the US dollar through a wider interest-rate advantage, a dynamic also seen in how Treasury yields influence USDJPY. However, if investors view them as evidence of deteriorating fiscal credibility rather than stronger growth, capital could eventually leave both Treasuries and the dollar.

Alternatively, suppressing long-term yields through buybacks, greater short-term issuance, or Fed support—without reducing deficits or controlling inflation—could raise concerns that the real value of US debt will be eroded by inflation and dollar depreciation. This could strengthen demand for stores of value such as gold and bitcoin as alternative safe havens.

A more sustainable solution would involve reducing structural deficits, controlling inflation and improving productivity so that economic growth outpaces the debt burden. However, this would require politically difficult decisions involving spending cuts, higher tax revenues or reforms to long-term government programmes—measures that may become increasingly difficult as military spending continues to rise. This environment helps explain why safe-haven assets have rallied recently.

Summary:

A persistently high 30-year Treasury yield could strengthen the dollar in the short-term but weigh on growth and financial conditions. Suppressing yields instead risks eroding confidence in the currency, deepening the debt-interest spiral through inflation and dollar depreciation.

The largest financial time bomb

Ultimately, US debt resembles a financial time bomb—potentially the largest in human history. No country has ever accumulated debt on this scale, while US Treasuries serve as collateral and pricing benchmarks across global markets, and the US dollar remains the leading currency for trade, borrowing, and international reserves.

We have already witnessed the stock-market and property bubbles burst. However, if the next bubble breaks, it could make those earlier crises look minor by comparison. This is a bubble in the fiat US dollar—a currency backed not by hard assets but largely by confidence and paper promises—at a time when central banks have progressively fewer policy options available.

We may already have passed the point of no return, with the consequences potentially forcing a great reset of the global monetary system. As Ray Dalio argues, new monetary orders often begin with hard money, or paper claims directly backed by it, before gradually evolving into credit-based fiat systems.

Summary:

US national debt has reached a scale with no historical precedent, raising doubts about the sustainability of the fiat dollar system. As the debt-interest spiral accelerates, the risks extend beyond markets to the credibility of the entire global monetary order.

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Final thoughts

I don't think the 40 trillion USD figure itself is what should keep investors up at night—it's the trajectory. What I find more telling is how quickly the debt-interest spiral has moved from an abstract long-term worry to a line item that now rivals defense spending. Buybacks, in my view, are a useful pressure release valve, but they're not a fix. They're buying time while the harder decisions on spending and revenue keep getting deferred.

What I'll be watching most closely is the 30-year Treasury yield. If it keeps grinding higher, I think that's the market quietly telling us it's losing patience with fiscal drift, not just pricing in inflation. And if policymakers eventually lean on the Fed to suppress yields instead of addressing the deficit directly, I'd expect that to show up first in the dollar and in demand for gold and bitcoin, long before it shows up in headlines. Either way, I don't think this is a problem that resolves quietly— it gets managed until, at some point, it can't be anymore.

Disclaimer: This article is for informational purposes only and does not constitute financial or trading advice. Please conduct your own research or consult a licensed financial advisor before making any investment decisions.