Why Are Treasury Yields Rising, and What Does It Mean for the Economy?

The market for debt issued by the US government is usually a sleepy place, occupied mostly by bureaucrats and Wall Street traders. So when the Treasury market ends up on the front page of newspapers and the evening news, it’s rarely a good thing.

But like many other previously routine government functions in the Trump administration, Treasuries have been in the news a lot lately. That’s because the rates the Treasury pays to borrow in the markets have spiked several times since Trump took office in January 2025. The most recent example happened two weeks ago, when Treasury yields hit their highest level since 2007, during the onset of the global financial crisis.

The Treasury markets, and the rules that govern them, might seem like abstract concerns given all the other challenges facing the country right now, including how families can afford the basic things they need to live their lives. But these issues are all connected.

Why Are Interest Rates Spiking?

Treasury Secretary Scott Bessent has been fixated on the Treasury’s long-term borrowing rate for some time, probably in no small part because his boss (the president) is obsessed with low interest rates.  As the self-proclaimed “king of debt,” the president seems to believe most economic problems can be solved through more borrowing, from real estate deals to casinos to the federal budget. He wants to influence the Treasury market and the Fed—the independent central bank—to lower interest rates and weaken financial safeguards so that more people will want to borrow to take out mortgages or business loans.

The recent disruptions have shown what happens when this approach collides with the risks posed by Trump’s chaotic economic policies.

First, economic shocks created by the Iran war drove prices up, causing investors to demand higher interest rates to offset the elevated risks, including higher inflation.

Then, earlier this month, the Treasury Department intervened in the market for Japanese yen, ostensibly to prevent Japan from selling its Treasuries to prop up the sagging value of its national currency, an intervention that caught market observers off-guard and raised questions about whether and why it was needed. The mechanics of this fit with Bessent’s fixation on lower interest rates: Because bonds pay fixed future amounts, the yield—basically the interest rate—goes up when the price investors will pay for a bond today goes down, precisely what would happen if Japan sold billions in Treasuries to finance buying up the yen.

Next, markets have grown increasingly uneasy about the Trump administration and Congress’s trend of growing budget deficits driven by tax cuts for corporations and the wealthy, recently surpassing the milestone of $40 trillion in cumulative debt.

At the same time, the glut of private debt being issued by companies to finance the AI build-out is competing against Treasury bonds for investment, pushing prices down and yields up. Combining all of these ingredients is a recipe for higher costs and increased volatility.

How Is the Government Responding?

To calm investors’ nerves, Secretary Bessent announced the Treasury would buy back up to $4 billion in outstanding Treasuries to rebalance the government’s borrowing profile toward more short-term debt at more favorable terms.

This plan didn’t work for a few reasons.

First, the amount Bessent announced was too small relative to the size of the market—there are more than $30 trillion in Treasury securities outstanding—to make a difference.

Second, buybacks are not meant to stabilize Treasury prices; they’re meant to improve market liquidity at the margin by replacing old Treasuries that are hard to trade with new ones that trade in deep markets.

Third, the Treasury needs to finance its buybacks by borrowing through new, short-term Treasuries, so the Treasury would be borrowing money to buy back its outstanding debt. This new debt could, ironically, increase the government’s borrowing costs and exacerbate the debt load that is already spooking investors—because the interest rate on existing debt is lower than rates today.

If the Fed were to reverse course and support the Treasury market—buying more bonds and holding them on the Fed’s balance sheet—it would both expand the money supply in a way that could drive more inflation and signal a lack of independence and commitment to tackling inflation.

Finally, the program was announced in an ad hoc fashion, outside of the ordinary quarterly cadence of Treasury’s funding decisions, potentially weakening the message of confidence the move was intended to send.

In another irony, the one institution that possesses the firepower to calm the markets—and potentially affect rates—is the Fed, but Fed intervention now could end up making the situation worse. Again, some of the run-up in yields is due to the relatively high level of recent inflation and investors’ concerns about the Fed’s commitment to taming that inflation.

This puts Fed Chair Kevin Warsh in a box. He has said the Fed won’t intervene in markets and needs to shrink rather than grow its balance sheet. Because the balance sheet is mostly Treasuries, the Fed’s holdings are orders of magnitude larger than the potential sales Bessent stepped in to prevent Japan from executing.

If the Fed were to reverse course and support the Treasury market—buying more bonds and holding them on the Fed’s balance sheet—it would both expand the money supply in a way that could drive more inflation and signal a lack of independence and commitment to tackling inflation.

Most importantly, the Fed’s independence means it is only supposed to influence Treasury interest rates as a way of affecting interest rates across the broader economy, not to facilitate government borrowing. Walking back that commitment would disrupt the markets, and the economy, in even more dramatic ways.

OK, but Why Do the Treasury Markets Matter at the Kitchen Table?

Why does this dispute between Wall Street and Washington matter at all to the economy and working people?

First, because Treasuries have extremely low credit risk—the risk a borrower will default—the interest rate on Treasury securities serves as the risk-free rate of interest other lenders use as the basis for the rates they charge borrowers. If the interest rate on Treasuries goes up, so do the rates for people borrowing to buy a new car, take out a mortgage, or finance a small business—as well as any existing loans with variable interest rates. Think of it as a tax, collected by private banks, on people who are already being squeezed by high prices.

Second, remember that when the rates on new Treasuries go up, it drives down the value of existing Treasuries. Banks and other financial institutions hold large inventories of Treasuries as investment assets and use them to collateralize their financial transactions. This creates stress in financial markets, which can cause financial institutions to pull back from lending to businesses and consumers. Strong banks can keep lending to businesses and households through economic downturns, but the Trump administration is simultaneously deregulating Wall Street, making the financial system more fragile. Weaker financial guardrails mean US taxpayers could eventually be called upon to bail out overleveraged Wall Street banks to avoid a financial crisis.

If global demand for Treasuries falls, that will also raise costs both by increasing interest rates further and by decreasing the value of the US dollar, which makes imports more expensive.

The last risk is geopolitical. Elevated Treasury spreads started in April 2025, after the Trump administration’s ill-advised “Liberation Day” universal tariffs. They returned in January, after the president threatened tariffs on European countries defending Greenland’s sovereignty, causing financial market observers to speculate that Europeans could retaliate by dumping their Treasury holdings. Hostile rhetoric, protectionist policies, and recurring volatility have caused market participants and policymakers to question the United States’ longstanding role as a global provider of safe financial assets in the form of Treasuries. If global demand for Treasuries falls, that will also raise costs both by increasing interest rates further and by decreasing the value of the US dollar, which makes imports more expensive.

Where Do We Go from Here?

At this point, there are no easy answers for how the US government can pull itself out of the recurring cycle of market stress followed by chaotic policy responses that lead to future market stress.

At its most fundamental level, the financial system operates on a foundation of trust. Over the past 150 years, rules, protections, and even norms have been put in place to ensure people can trust that the US government will honor its commitments. When people lose that sense of trust, instability, panics, and financial crises can happen.

Curing what ails the Treasury market, and lowering the costs it drives on Main Street, ultimately requires an administration committed to responsible and effective financial stewardship.

A good place to start would be restoring the US  government’s reputation as a reliable and respected domestic and international actor committed to the rule of law and financial stability. If the administration wanted to do something to directly address the increasing cost of mortgages and small business loans, it could end its illegal crusade to dismantle the Consumer Financial Protection Bureau, the agency that protects consumers from predatory financial practices, a crusade that has already cost consumers $19 billion. Unfortunately, it’s highly unlikely either of these things will happen anytime soon.

Without credibility, stability, and integrity, the financial market—and ultimately the economy—are at risk of collapsing in the same way Hemingway talked about bankruptcy: gradually, then suddenly.

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