Market crash exposes Wall Street's real fear: U.S. debt

Two competing theories on yields

Wall Street has debated why Treasury yields rose so much this year. Some blamed AI companies flooding the bond market with debt. Others pointed to fiscal risk from U.S. government borrowing.

The 10-year yield's dramatic climb

The 10-year Treasury yield shot up more than 100 basis points, soaring above 5% and at one point hitting the highest level in 24 years before easing in recent weeks.

What drove yields higher

The Iran war started in late February, sending oil prices up and raising inflation expectations. Simultaneously, hyperscalers flooded the bond market with debt to finance AI infrastructure, keeping the economy hot.

Robin Brooks's natural experiment

Robin Brooks, a senior fellow at the Brookings Institution, said last week's market selloff was a natural experiment testing which theory was correct about Treasury yields rising.

Brooks's fiscal risk argument

Brooks argued that corporate borrowing is nowhere near early two-thousands IT bubble levels, while public borrowing is historically high and more likely driving up yields, not AI debt.

“On one end of the spectrum are people like me who think this is a rising fiscal risk premium as our public debt grows out of control.”

The fiscal crisis evidence

The federal budget deficit widened to one point ninety nine trillion dollars in fiscal twenty twenty six, twelve percent worse than the one point seventy eight trillion gap in fiscal twenty twenty five.

Interest costs spiral upward

Gross interest costs for fiscal twenty twenty six reached one point thirty six trillion dollars at an average rate of three point fifty three percent, more than double the rate in twenty twenty one.

“Higher interest begets more debt, and greater debt begets higher rates and higher interest. Eventually, the whole thing could come crashing down.”