Forty Trillion Reasons to Watch the Bond Market

David Halseth
4 hours ago
2 min read

For the week ended 8/22/26.

Last week, gross U.S. federal debt crossed the $40 trillion threshold. The number itself is more symbolic than economically magical – nothing breaks at $40 trillion that was working perfectly at $39.9 trillion – but the trajectory should command our attention.

It is important to distinguish gross federal debt from debt held by the public, which is currently about 101% of GDP. Unfortunately, that version of the math is not exactly comforting. The Congressional Budget Office projects publicly held debt will reach 120% of GDP in 2036 and 175% by 2056 under current law. Meanwhile, foreign investors own a shrinking share of Treasurys, with hedge funds increasingly helping fill the gap. What could possibly go wrong with adding leverage to a $40 trillion debt problem?

The spending math explains why fixing it is so difficult. Social Security, Medicare and other mandatory programs consume most federal spending, while net interest costs now roughly rival Medicare spending and exceed defense. Benefits are politically painful to trim; interest payments are not optional. Eventually, arithmetic gets a vote.

The Federal Reserve is wrestling with its own uncomfortable arithmetic. Minutes from the July meeting showed that several officials favored a 25-basis-point increase, although only three formally dissented from the decision to hold the federal funds rate at 3.50% – 3.75%. Many participants indicated that tightening could become necessary if inflation fails to decline. In short, rate hikes are no longer merely the wild theory of your occasionally contrarian MMM author.

Treasury Secretary Scott Bessent then tossed the bond market a curveball by announcing that long-term Treasury buybacks would at least double, from $2 billion to $4 billion per operation. Yields initially fell, but the relief lasted about as long as an ice cube in August. The 10-year Treasury finished Friday at 4.737%, up from 4.695% the prior week. The bond market’s message was blunt: buybacks may improve liquidity, but they do not fix deficits.

Commodities led the week with a 3.8% gain. Foreign stocks and cash added 0.1%, while bonds fell 0.1% and U.S. stocks declined 1.4%.

This week brings Consumer Confidence on Tuesday, followed Wednesday by the second estimate of Q2 GDP and the core PCE Price Index.

Good morning – and enjoy the final dog days of summer. Football is nearly here.