Long-term borrowing costs for the US government rose above 5% on Monday, causing fresh concern among investors. This happened shortly after credit rating agency Moody’s downgraded the US credit outlook. The rise in bond yields marked the highest point since October 2023. Though the rates later dipped slightly, the short-term spike showed that the market is still uneasy.
Moody’s made its decision on Friday. It pointed to the rising national debt, which has now reached $36 trillion. The agency warned that government debt levels have climbed for years without serious steps to fix them. Congress added to these concerns by advancing new legislation expected to increase the debt by another $3 trillion.
US government bonds, called Treasuries, are used to borrow money from investors. These investors include pension funds, central banks, and private institutions. When someone buys a Treasury bond, they are lending money to the government. In return, they get paid back with interest over time. The interest rate paid is called the yield. Higher yields usually mean more risk. That is because investors want higher returns when they feel less confident about being repaid.
For many years, the US paid low interest on its debt. This was because investors trusted the US economy and government. Treasuries were seen as one of the safest investments in the world. After the 2008 financial crisis, yields remained low, staying near 3% for most of the next decade.
But things changed after the COVID-19 pandemic. Inflation started to rise, and the government kept borrowing more. In October 2023, yields jumped above 5% for the first time in 16 years. This week, the 30-year yield rose to 5.04% before dropping slightly below 5% again.
Moody’s had warned about a possible downgrade since last year. The agency finally acted because of the growing debt and the lack of strong financial reforms. The downgrade reflects not only the size of the debt but also a lack of trust in the government’s ability to fix it. Analysts say the move signals that investors are now more cautious about lending to the US.
The effects of higher bond yields go beyond the financial markets. They also impact the daily lives of Americans. Government borrowing costs influence other interest rates, such as credit cards, mortgages, and car loans. As rates rise, borrowing becomes more expensive for households and businesses.
This is especially tough for small businesses. They often rely on short-term loans to manage their cash flow. When borrowing costs go up, these loans become harder to get or more costly. That can slow down hiring and growth. For families, higher interest rates can make it more difficult to buy homes. Many people are now waiting longer before buying or moving.
Rising interest costs also put pressure on the federal budget. Right now, a large part of government revenue goes toward paying interest. Moody’s projects that by 2035, interest payments could take up 30% of all federal income. That is a big jump from just 9% in 2021. If this happens, it could mean less money for important services like health care, education, and infrastructure.
The US government is facing a tough choice. If it keeps borrowing without limits, it may face more credit downgrades in the future. This could raise borrowing costs even more. On the other hand, cutting spending or raising taxes can be politically difficult.
Investors will be watching closely in the coming weeks. If Congress continues to pass large spending bills without matching revenue, bond yields could rise again. That would create more pressure on the economy and increase the risk of a slowdown.
The recent spike in bond yields shows that trust in US debt is no longer guaranteed. As borrowing becomes more costly, leaders in Washington may be forced to take serious action. Until then, the market will likely remain on edge.