Yields at latest Treasury auction reach 25-year high

The US has had to pay the highest interest rate in 25 years to sell its government bonds amid concerns about the country's debt load and rising inflation.

At an auction of $25 billion in 30-year Treasury bonds on Thursday, yields reached as high as 5.22 percent, the US Treasury Department said. That is the highest since the 5.52 percent yield in August 2001, the last time the US had a budget surplus.

Last year, the US had a budget deficit of $1.85 trillion, or about 6.3 percent of GDP, a shortfall that the government has to make up by borrowing through the sale of Treasury bonds to pay for government programs.

"All in all this is problematic for the Treasury. They have to fund the government at more expensive levels," Gennadiy Goldberg, head of US rates strategy at TD Securities, was quoted as saying by the Financial Times.

The yield on 30-year Treasurys in a July auction was 5.06 percent, while it was 4.91 percent before Trump's second term began.

David Rosenberg, founder of Rosenberg Research, said that rising bond yields could create a drag on the stock market by harming economic growth.

US government debt has grown to almost $40 trillion, near a record debt-to-GDP ratio, and it now pays more in interest charges — about $1 trillion a year — than it spends on its military.

Historian Niall Ferguson has warned that when a country spends more on servicing its debt than on defense — a situation he calls the Ferguson Limit — it risks losing its position as a great power.

"This is because the debt burden draws scarce resources toward itself, reducing the amount available for national security, and leaving the power increasingly vulnerable to military challenge," Ferguson said.

"In the absence of radical reforms of its principal entitlement programs — which successive administrations have ruled out — the only plausible way that the United States can come back within the Ferguson Limit is therefore through a productivity miracle," Ferguson said.

Andrew Szczurowski, strategic income portfolio manager at Morgan Stanley Investment Management, pointed out that foreign ownership of US Treasurys had declined over the past decade from roughly 33 percent to about 23 percent.

"There is less official buying" by other governments, he said.

However, he said that foreign investors' and governments' diversification from Treasurys didn't necessarily threaten the dollar's status as a reserve currency.

The US Bureau of Labor Statistics reported on Thursday that the US Producer Price Index rose 4.7 percent year-on-year in July, down from 5.5 percent in June. Combined with a decline in the Consumer Price Index to 3.4 percent in July, that will ease pressure on the Federal Reserve to raise interest rates in the near term to bring down inflation.