US Long-Term Treasury Yields Breach Key Psychological Barriers as Yen Defense, Protracted War and Sweeping Tax Cuts Deliver Triple Shock

Psychological resistance thresholds collapse across the US long-term yield curve
Long-term Treasury demand falters amid widening fiscal deficits and shrinking tax revenue
US-Japan coordination to defend the yen fuels fears of Japanese Treasury sell-offs

The yield on the 30-year US Treasury surged to its highest level since 2007, intensifying tensions across global financial markets. With the national debt approaching $40 trillion and sweeping tax cuts increasing the US government’s borrowing burden, concerns have spread that Japan could liquidate its US Treasury holdings to finance currency intervention as Washington and Tokyo step up coordinated efforts to defend the yen. Inflation fears also intensified after a 60-day ceasefire and negotiation deadline between the United States and Iran expired without an agreement, sending international oil prices sharply higher, while the fiscal burden from a protracted war placed additional upward pressure on long-term yields.

30-Year US Treasury Yield Breaches 5.31% Intraday

According to Bloomberg on Aug. 18, the 30-year US Treasury yield climbed as high as 5.31% in trading on Aug. 17, its highest level since June 2007. The 20-year yield briefly entered the 5.3% range, reaching its highest point since October 2023. The benchmark 10-year yield also rose to 4.72%, marking its highest closing level since July 31. Rising bond yields indicate falling bond prices, signaling that market participants are selling long-dated US government debt.

The 10-year US Treasury yield had already surged to 4.75% on July 31. Wall Street typically regards 5.0% for the 30-year yield and 4.5% for the 10-year yield as key psychological resistance thresholds, both of which have now been breached by a wide margin. The issuance yield on 30-year US Treasuries had followed a steady upward trajectory amid inflationary pressure, reaching 5.046% on May 13 and setting a new high since 2007. The 10-year auction yield also climbed to 4.683% on Aug. 12, its highest level since 2007.

$40 Trillion National Debt Alarm

The rapid decline in US Treasury prices largely reflects mounting concerns over America’s expanding national debt and persistent inflation. Investors are demanding higher yields on long-term government bonds to compensate for fiscal and inflation risks, pushing bond prices lower and yields higher. Weak July employment data and declining retail sales have somewhat eased pressure on the Federal Reserve to raise its short-term policy rate further, but inflation above 3% continues to weigh on the market.

The deterioration in US public finances has accelerated markedly. Federal government debt, which stood at approximately $36 trillion at the end of November 2024 shortly before President Trump returned to office, had swollen to $39.9 trillion as of Aug. 17. The cumulative fiscal deficit through July of fiscal 2026 has already surpassed the entire fiscal 2025 deficit of $1.775 trillion. Fitch Ratings projects the US fiscal deficit will reach 7.4% of gross domestic product (GDP) in 2026–2027. Concerns that the government will inevitably increase Treasury issuance to finance these large deficits are driving ultra-long-term yields higher.

Table 1. Deterioration in US National Debt and Fiscal Deficit

Fallout from US-Japan Coordination to Defend the Yen

A more immediate shock originated in Japan’s bond market. Market participants regard the repatriation of Japanese capital as one of the largest variables. As Japanese government bond yields rise and yen weakness increases currency-hedging costs, Japanese life insurers and pension funds are increasingly likely to reduce investments in overseas bonds, including US Treasuries. Japan’s holdings of US Treasuries have declined for two consecutive months. Unrealized losses on Japanese government bonds held by Japanese life insurers reached approximately $194.8 billion at the end of June, up 60% from a year earlier.

Joint US-Japan intervention in the foreign exchange market has also heightened vigilance in the Treasury market. After the yen weakened to around 164 per dollar, its lowest level in 40 years, the Japanese government launched large-scale yen purchases on July 30. The market estimates that approximately $37.8 billion to $44.1 billion was deployed that day alone. Further intervention followed on July 31, bringing the two-day total to at least $63.0 billion. Japanese foreign exchange authorities had previously intervened to the tune of approximately $73.7 billion in April and May. Combined, recent intervention has exceeded $126.0 billion, far surpassing the annual record of approximately $96.4 billion set in 2024.

As concerns mounted that the weak yen could destabilize both the Japanese economy and the US Treasury market, the US Treasury joined Japan’s defensive campaign by purchasing yen through the Federal Reserve Bank of New York. It marked the first direct US intervention alongside Japan to support the yen since the 2011 Great East Japan Earthquake. US Treasury Secretary Scott Bessent has also indicated that joint intervention could be repeated if disorderly yen movements re-emerge. Japan is the world’s largest foreign holder of US Treasuries, with $1.14 trillion in holdings as of the end of May. Large-scale Treasury sales by the Japanese government to finance yen purchases would intensify upward pressure on US long-term yields.

Protracted Iran War Exerts Dual Inflationary and Fiscal Pressure on US Treasuries

As the demand base for US Treasuries weakened, the war with Iran added selling pressure through both inflation and fiscal channels. The 60-day ceasefire and negotiation deadline set by the United States and Iran expired without an agreement on Aug. 17, raising the prospect that a prolonged war could become a new catalyst for higher US Treasury yields. Iran warned that it would escalate its offensive after the negotiating deadline expired, while President Trump ruled out extending the agreement. Brent crude consequently rose to $91.63 per barrel on Aug. 18, its highest level since July 30. Energy-driven inflation concerns resurfaced as shipping disruptions persisted in the Strait of Hormuz, which handles roughly one-quarter of global seaborne crude oil trade, with only six cargo vessels passing through the waterway on Aug. 17.

The US fiscal burden has also increased. Defense Secretary Pete Hegseth told the Senate Appropriations Committee last month that direct spending on the war with Iran had reached $37.5 billion. The White House separately requested $87.6 billion in supplemental funding from Congress, including $67.1 billion for military expenditures. The allocation includes $17.3 billion in operational expenses, $21.0 billion for ammunition procurement and $1.5 billion for fuel. As the conflict drags on, the United States must replenish depleted missiles and interceptors while absorbing higher costs for naval vessels, aircraft operations and troop deployments.

The escalating cost of the war is directly hitting US households. The average US gasoline price reached $4.06 per gallon in August, approximately $1 higher than a year earlier. Democratic staff on the US Congress Joint Economic Committee (JEC) estimated that American consumers incurred $56.4 billion in additional gasoline expenses between the outbreak of the war on Feb. 28 and July 12, equivalent to $477 per household. Mark Zandi, chief economist at Moody’s Analytics, projected that war-driven increases in gasoline prices, transportation costs and airfares would add $1,000 per household, while the burden of financing military expenditures would add another $250. The total household war bill would therefore reach $1,250.

These dynamics explain the bond market’s growing concern over a protracted war. Higher military spending expands the fiscal deficit and Treasury issuance, while rising oil prices lift inflation expectations. As the Federal Reserve exercises caution over further policy-rate increases amid concerns about an economic slowdown, long-term bond investors are adding greater fiscal and inflation risks to the term premium. This explains why the 30-year Treasury yield has continued to rise even as expectations for further policy-rate increases have weakened. The interaction between a US government financing war expenditures through debt issuance and investors demanding greater compensation for inflation risk has also increased the likelihood that elevated ultra-long-term yields will persist. The Japanese shock disrupted the supply-demand balance in the bond market, while war costs raised the risk compensation required to hold US government debt.

US Treasury’s Borrowing Reliance Deepens amid Revenue Cliff

While the war with Iran drives federal spending higher, the Trump administration’s sweeping tax cuts are also eroding the government’s revenue base. The One Big Beautiful Bill Act (OBBBA), signed by President Trump on July 4 last year, includes extensions of tax cuts enacted during his first administration in 2017 and deductions for corporate capital investment. Major provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that had been scheduled to expire at the end of last year—including lower individual income tax rates, an expanded standard deduction and an enhanced child tax credit—were made permanent through the OBBBA and have been fully implemented beginning with the 2026 tax year. Provisions retroactively applied to 2025 income, including tax relief for tips and overtime pay, an additional deduction for seniors and a deduction for interest on loans used to purchase US-made vehicles, have also translated into lower federal revenue this year through tax refunds and withholding adjustments.

The scale of the US tax cuts far exceeds the amount that spending reductions can absorb. The Congressional Budget Office (CBO) estimates that implementation of the OBBBA will reduce federal revenue by $4.5 trillion between 2025 and 2034. Even after $1.1 trillion in spending cuts to Medicaid, the Supplemental Nutrition Assistance Program (SNAP) and student loans, the primary fiscal deficit will widen by $3.4 trillion over the same period. Including $718 billion in interest expenses arising from additional Treasury issuance, the cumulative increase in the deficit will reach $4.1 trillion. The OBBBA alone could push the ratio of publicly held federal debt to GDP in 2034 up by 9.5 percentage points from the previous forecast.

As the effects of the tax cuts begin to feed fully into federal revenue this year, the US Treasury’s borrowing requirements are expected to rise further. Making provisions scheduled to expire in 2028–2029, including tax relief for tips and overtime pay, permanent would add another $800 billion to the primary fiscal deficit through 2034 and increase the cumulative deficit expansion, including interest costs, to $5 trillion. The $5 trillion increase in the federal debt ceiling enacted alongside the legislation last year has eased immediate concerns over default, but the US Treasury still faces the full burden of issuing enough government debt to finance massive deficits.