The towering mountain of debt hanging over the economy has displaced the AI boom as the dominant story on Wall Street.

For years—decades, even—the spiraling trajectory of U.S. debt generated dire warnings that investors repeatedly shrugged off, as low borrowing costs helped turbocharge epic stock market gains. All the while, the debt pile kept climbing past $36 trillion, a sum now larger than the nation's annual economic output; interest costs consumed a growing share of the federal budget, overtaking defense spending; and deficits continued to widen. Rating agencies downgraded U.S. credit—S&P in 2011, Fitch in 2023, and Moody's in 2025, which stripped America of its final triple-A rating—and foreign central banks pared back their purchases of Treasuries, with China's holdings falling to their lowest level in more than a decade.

Exactly where the tipping point sat was never clear—particularly while the U.S. dollar retained its status as the world's top reserve currency. But the global bond selloff of the past week, which sent yields to their highest level in two decades, has pushed debt squarely to the front and center of market concerns. The stakes reach beyond trading desks: Treasury yields serve as the benchmark for borrowing costs across the economy, so a sustained rise feeds through to rates on mortgages, corporate loans, credit cards, and other everyday credit.

"When does debt become unsustainable? When the global financial markets say it is," RSM Chief Economist Joseph Brusuelas wrote in a note on Wednesday. "That appears to be happening."

The anxiety extends well beyond the United States. Yields have also surged in other top economies, including the U.K., France, Germany, and Japan. Since the COVID pandemic, governments there have continued to spend as though borrowing costs were still at crisis-era lows, allowing deficits to worsen as if their economies remained in desperate need of emergency stimulus.

The economic landscape, however, is now totally different. Interest rates have surged in recent years to combat high inflation, and the AI boom is pouring hundreds of billions of dollars a year into an economy that has grown increasingly immune to higher rates. On top of that, the so-called hyperscalers are relying more on debt to finance their capital expenditures—Meta's $30 billion bond sale last year ranked among the largest corporate debt offerings on record—competing directly with the Treasury Department for bond market dollars.

"Given that public debt is already so high for many countries, it's only been a matter of time until markets run out of patience," Robin Brooks, a senior fellow at the Brookings Institution, wrote in a Substack post on Tuesday. "It looks like that's happening now."

Yields rose so quickly that the Treasury Department abruptly announced it would increase buybacks of long-dated bonds. The move lowered yields only briefly; they climbed again as investors doubted that such financial engineering can hold back the tide. Investor attention now extends to the government's routine funding operations as well—the quarterly refunding announcements and auctions through which trillions of dollars in maturing Treasuries must be refinanced at prevailing rates.

How did we get here?

Beyond deficits, several other factors converged to finally set off the market's alarm bells.

The more proximate cause was the return of higher oil prices amid the ongoing stalemate between the U.S. and Iran. With no signs of diplomatic progress, investors expect energy costs to keep inflation higher for longer—likely forcing central banks to hike rates.

At the same time, Federal Reserve Chairman Kevin Warsh has refused to offer forward guidance on how policymakers will respond to future inflation, creating uncertainty that has placed even more upward pressure on bond yields.

Brusuelas also pointed to an "elephant in the room": economic populism from both sides of the political aisle. From the left, it takes the form of more spending; from the right, it typically means tax cuts. Both versions, he added, tolerate higher inflation and resist efforts by central banks to rein it in.

"If such policies go on long enough without a course correction, banking and currency crises tend to follow," Brusuelas warned. "Global investors understand the end game of such policies."

Analysts at Capital Economics, in a note on Tuesday, similarly said bond investors are demanding greater compensation for fiscal, geopolitical, and policy uncertainty—a shift they described as one that will prove persistent. While the pace of the bond selloff is not justified by recent events, they added, the market's concerns are rational given that governments show little indication of curbing their deficits.

That means a higher term premium—the extra return investors demand for holding an asset over the long term—is "fundamentally warranted."

"As a result, we expect term premia to remain elevated and bond markets to remain susceptible to renewed bouts of volatility in the quarters ahead," Capital Economics predicted.

Source: Fortune