As the conflict between the United States and Iran remains deadlocked, U.S. Treasury yields have continued to rise, and this has caused concern in financial markets. Driven by rising oil prices, the U.S. Treasury market has experienced heavy selling. On August 18, the yield on the 30-year U.S. Treasury bond broke through the 5.3% threshold, reaching 5.311% and hitting its highest level since June 2007, while the yield curve steepened at an accelerated pace. The 30-year Treasury yield has remained above 5% since July 7, and the 10-year U.S. Treasury yield, which serves as a benchmark for market interest rates, currently stands at 4.73%, also approaching a multi-year high.

The continuous rise in U.S. long-term market rates has impacted both the stock and foreign exchange markets, with the three major U.S. stock indices pulling back in response and the U.S. dollar index softening slightly. At the same time, related pressures have transmitted to Asian markets. The result is that the stock markets in Japan and Korea closed lower on August 18. The Nikkei 225 index closed down 2.54%, while the Korea Composite Stock Price Index opened higher before falling to close down 1.55%. As U.S. Treasuries have declined, Japanese government bonds and European sovereign debt have fallen to varying degrees, signaling that global sovereign debt risks are deepening and making global capital markets increasingly concerning, and this happens when there are already issues of the AI investment boom.

The rise in Treasury yields affects the U.S. Treasury Department, which relies on issuing U.S. government debt to bridge its fiscal deficit. On August 13, the Treasury auctioned USD 25 billion of 30-year bonds, with the high yield reaching 5.22%, the highest level since August 2001. This means the U.S. government will need to pay higher interest to alleviate investors' concerns, signifying that future U.S. fiscal deficits will expand further. Higher market interest rates will likewise transmit to the real economy. For the week ending August 14, 2026, the average interest rate on a 30-year fixed-rate mortgage in the U.S. was 6.67%. Although this is a slight decrease from 6.69% the previous week, it remains at a high level, causing a slowdown in U.S. home sales. While the Federal Reserve has kept the federal funds rate unchanged, the elevation of long-term market rates has not only dealt a blow to U.S. equities but has also affected consumer loans such as auto loans, as well as credit demand for corporate investment.

Shifts in inflation are the primary factor driving U.S. Treasury yields higher. Earlier this year, the market was rather optimistic about the development of interest rates, even expecting the Federal Reserve to cut rates as inflation receded. However, after the outbreak of the Middle East conflict, this expectation vanished amidst oil price volatility. Current international oil prices are hovering between USD 80 and USD 90, which is lower than when the U.S.-Iran conflict erupted. Yet, the protracted nature of the conflict means this geopolitical risk shows no sign of ending in the short term. The increased unpredictability of energy stability casts a shadow over the U.S. inflation outlook. The rise in long-term Treasury yields indicates that the market's expectations for long-term U.S. inflation are far from optimistic. If this proves to be true, not only will the Federal Reserve fail to cut rates this year, but the necessity for a rate hike will become increasingly pronounced, which will dictate the direction of capital markets. Considering current concerns stemming from the AI investment boom, the likelihood of sharp volatility in U.S. stocks increases accordingly. Therefore, rather than saying the market is influenced by Treasury yields, it is more accurate to say it is influenced by changes in inflation. With core inflation still exceeding the 2% target, the Fed may even be forced to initiate a new rate-hike cycle. As researchers at ANBOUND anticipated, this means a soft landing for the U.S. economy is basically unachievable, and future inflation will exhibit greater stickiness and prove harder to bring back within target.

Once this expectation forms a market consensus, it could replay the "stagflation" scenario of the 1980s. This is likely a disaster that neither the Trump administration nor the newly appointed Fed Chair Kevin Warsh can afford. Under these circumstances, both Warsh and President Trump have toned down their calls demanding that the Fed cut interest rates.

Another major factor driving up U.S. Treasury yields, in the view of outsiders, is the continuous growth in the size of the U.S. national debt. Although the Trump administration previously established a Department of Government Efficiency to promote budget cuts, its deficit-reduction efforts ended in a shambles following Elon Musk's departure. Meanwhile, the U.S. government's efforts to offset the deficit through additional tariffs were invalidated by the courts, failing to generate revenue for the government and instead requiring it to refund over-collected tariffs. As a result, the imbalance in the federal government's fiscal revenues and expenditures continues to widen. The latest data from August 12 shows that in July, U.S. fiscal expenditures reached USD 766 billion, a year-on-year increase of 22%, while revenues were approximately USD 334 billion, down 1% year-on-year. The monthly deficit reached USD 432.3 billion, a year-on-year increase of about 48%, marking the largest single-month deficit since March 2021. A substantial increase in Medicare spending and tariff refunds were among the factors that jointly pushed up that month's deficit. In the first ten months of the current fiscal year, the cumulative U.S. fiscal deficit has already reached approximately USD 1.8 trillion, an increase of about USD 169 billion over the same period last fiscal year. With two months remaining until the end of the fiscal year, the cumulative deficit has already exceeded the total for the entire 2025 fiscal year. The Congressional Budget Office (CBO) previously projected that the U.S. budget deficit could expand further in fiscal 2026. During the first ten months of this fiscal year, U.S. government interest payments on debt reached USD 1.17 trillion, up from USD 1.01 trillion in the same period last year, while net interest payments excluding interest income reached USD 931 billion. The expansion of the fiscal deficit has exposed the market to the risk of fiscal out-of-control and increased market concerns regarding the creditworthiness of U.S. Treasuries.

For the U.S., inflation and debt are not sudden "black swan" events. Rather, they resemble two "gray rhinos", i.e., long-term problems plaguing the U.S. economy. Although the continuous rise in U.S. Treasury yields is unfavorable to the market and the U.S. economy and brings distress to capital markets, it has not yet reached the point of rapid deterioration. Corresponding risks are still accumulating, which is the root cause of market volatility and panic. Some institutions, such as Yardeni Research, believe that U.S. Treasury yields should operate within a normal range of 4% to 5% without causing substantial negative impacts on the economy and corporate earnings, but they emphasize that as yields approach the upper bound of this range, the alert level has risen significantly. In fact, considering that the U.S. promoted multiple rounds of quantitative easing policies following the 2008 financial crisis, debt and inflation issues are actually the trend-based consequences of the integration of fiscal and monetary policy. The two are closely related, reflecting the structural drawbacks of the highly financialized U.S. economy.

Theoretically, the U.S. could remedy its inflation and debt dilemmas through dual fiscal and monetary tightening policies. However, aside from the side effects of economic softening, what makes it difficult for U.S. policymakers to make a firm decision is primarily political factors. Tightening policies often mean that ordinary citizens must bear the corresponding consequences, putting the political parties advocating such policies at a disadvantage in elections. In fact, as ANBOUND previously pointed out, the impact of high energy and food prices on the U.S. midterm elections is already manifesting. At present, a shift in the control of the U.S. Congress has become a high-probability event. Once the Democrats regain control of Congress, the Trump administration's fiscal budget will likely become a casualty of political maneuvering, not only further damaging the credit of U.S. Treasuries, but also making inflation difficult to digest. This may be a major driving force behind investors starting to sell off U.S. Treasuries, and it is a clear example of the concept of “political finance” mentioned by ANBOUND's founder Mr. Kung Chan.

At the same time, effective policy solutions for these structural issues remain scarce. More likely, the fiscal approach will involve issuing government debt through a "short-term increase and long-term reduction" strategy. This is about adjusting the maturity structure of government debt issuance, improving the supply of long-term Treasuries, and influencing the interest rate corridor, while the monetary approach will require Warsh to cooperate with the Trump administration to delay the pace and intensity of interest rate hikes as much as possible, using liquidity regulation to influence market rates. In fact, the U.S. Treasury Department recently announced that it would double the scale of its early buybacks of long-term Treasuries. However, this "buy-long" operation is largely an expedient measure that fails to reduce the deficit and relies even more heavily on the Federal Reserve to provide funds, which the market has interpreted as "disguised QE". Robin Brooks, a senior fellow at the Brookings Institution, bluntly stated that this is a clear sign that the U.S. is following Japan down the path of currency depreciation and warned that Washington is "playing with fire". Following the announcement, the dollar weakened rapidly, with the index falling below 99, while long-term Treasury yields tended to rise again after a brief recovery. It is obvious that the U.S. government has no foolproof way to address the two "gray rhinos". Of course, if market trends continue to deteriorate, the possibility cannot be ruled out that Trump might make a desperate gamble before the midterm elections by introducing extreme trade and financial policies.

Changes in U.S. Treasury yields, which serve as an international market benchmark, inevitably impact global markets. This impact has already manifested in the markets of developed economies such as Japan and South Korea. Amid the continuous weakening of the yen, the Bank of Japan (BOJ) has had to choose to continue raising interest rates, and Europe has also initiated rate hikes. This has forced the majority of global economies to enter a rate-hiking cycle, posing risks to exchange rate stability and global market stability. For China, the lack of synchronization in interest rate cycles leads to a widening of the interest rate differential between China and the U.S., which will not only affect China’s own cross-border capital flows and the stability of the domestic capital market, but will also constrain its current domestic monetary policy, impacting the flexibility and effectiveness of macroeconomic policy.

Final analysis conclusion:

The continuous rise in U.S. long-term Treasury yields is driven in the short term by geopolitical risk volatility. Yet, at its root, it is plagued by the two "gray rhino" issues of inflation and debt. Market concerns will grow increasingly intense as the U.S. midterm elections approach. The structural dilemmas of U.S. political finance will be difficult to resolve effectively in the short term and will continue to inject instability into global markets.