Yields Signal Alarm: US Fiscal Deficit Fears Shake Global Markets

22 May 2025

What’s Causing the Surge in Yields?

The 10-year US Treasury yield touched 4.54%, its highest level in over a month. At the core of this jump lies a growing fear that the US fiscal deficit estimated at $1.9 trillion for FY2024 is becoming unmanageable. To plug this gap, the US Treasury plans to borrow a staggering $1.6 trillion in the second half of FY2024 alone.

And here's the twist: demand for US debt is weakening. Countries like China and Japan, historically the biggest foreign buyers of Treasuries, are cutting back partly due to currency stabilization goals, and partly due to rising geopolitical caution. With more bonds coming and fewer takers, yields are moving up to attract interest.

Investor Sentiment Turns Defensive

Big money managers are adjusting fast. Institutional portfolios are rotating out of long-duration bonds and into safer, shorter-term assets. As one JP Morgan executive put it:

“The bond market is acting as a fiscal disciplinarian. Until there is clarity on spending reforms, investors will demand a premium.”

Retail investors are also shifting into money market funds and short-term treasuries. The mood is turning cautious—even among traditionally risk-tolerant groups.

What Top Brokerages Are Saying

Goldman Sachs:

“The surge in yields reflects both deficit-driven supply concerns and lower odds of near-term Fed cuts. This raises borrowing costs and could weigh on corporate valuations.”

Morgan Stanley:

“Higher real yields mean equity multiples could compress. Tech and utilities—rate-sensitive sectors—are particularly vulnerable.”

Nomura:

“Unless there's fiscal consolidation or Fed easing—which looks unlikely for now—we see yields staying elevated.”

Economic Impact: A Vicious Cycle?

When yields rise, so does the US government’s interest bill—meaning future deficits grow even more. It’s a fiscal loop that’s hard to escape.

Corporate borrowing becomes more expensive, especially for real estate, infrastructure, and small business loans. Consumers are also feeling the pinch—mortgages, auto loans, and credit card rates are climbing, potentially denting the biggest engine of US GDP: household consumption.

The Federal Reserve is now stuck between two tough choices:

Cut rates and risk reigniting inflation, or
Hold firm and risk choking growth.

US Stock Market: Feeling the Heat

Equity markets aren’t taking this well. The S&P 500 has turned volatile, and the NASDAQ home to rate-sensitive growth stocks has seen sharper corrections. Defensive plays like consumer staples and energy are holding up better, as investors look for stability.

Fallout in India and Emerging Markets

As US yields climb, money tends to flow out of emerging markets and into US bonds. That’s already happening.

The Indian rupee has weakened past 83.30 against the dollar, prompting speculation of RBI intervention. Sectors like IT and Pharma, which earn heavily from the US, are seeing some stock-specific corrections due to both yield and currency concerns.

Kotak Securities:

“Volatility in large-cap Indian equities is likely to continue until US yields stabilize.”

Motilal Oswal:

“With FPI inflows on pause, investors should turn to domestic demand-driven sectors for safety.”

Conclusion: A Wake-Up Call

This bond market move is not just a blip it’s a signal. Unless the US addresses its structural deficit and borrowing spree, yields could stay high, weighing on everything from Wall Street valuations to global emerging markets.

For Indian investors, this is a reminder to keep one eye on the RBI and the other on the US Treasury auction calendar. Because when the world’s largest borrower stumbles, no market is truly insulated.

Sources & References:

US Treasury Department Reports

CBO Budget Outlook, 2025

Goldman Sachs Market Insights (May 2025)

Nomura Global Macro Note

RBI FPI Weekly Report

Bloomberg, CNBC US Bond Market Data