The recent stock-market selloff has offered a fresh test of why US Treasury yields have climbed. Robin Brooks, a senior fellow at the Brookings Institution, argues that rising long-term yields are more likely to reflect investor concern about federal debt and deficits than borrowing by artificial intelligence companies. The distinction matters for the government’s future financing costs and how markets assess the sustainability of US public finances.
10-year Treasury yield briefly topped 5%
The 10-year Treasury yield has eased in recent weeks as investors sought safety in government bonds. Before that pullback, however, it had risen by more than 100 basis points, breaking above 5% and reaching a 24-year high.
The climb began after the war with Iran broke out in late February. Higher oil prices lifted inflation expectations and led markets to price in a greater chance of Federal Reserve rate hikes. At the same time, large cloud-service providers issued debt to fund AI infrastructure and heavy capital spending, drawing investor funds. The US government, meanwhile, must borrow in bond markets to finance a budget deficit of about $2 trillion and pay interest on roughly $40 trillion in federal debt.
Some on Wall Street argue that AI-company borrowing has crowded Treasuries out of investor portfolios, forcing the Treasury Department to offer higher yields at bond auctions. Brooks disputes that explanation. He sees the market moves of the past week as a “natural experiment” that helps distinguish between competing accounts.
Jobs data and forward yields point to fiscal concerns
Brooks notes that corporate borrowing remains far below the levels seen during the dot-com boom of the early 2000s. Federal borrowing, by contrast, is historically high, making it a more plausible driver of higher yields.
He also examined the bond market’s response to the latest monthly jobs report, which showed payroll growth at more than twice the consensus forecast. Compared with similar upside surprises in the past, the rise in the two-year Treasury yield was larger than strong economic growth alone would explain. Brooks says that response weakens both the argument that US growth depends on AI and the claim that AI-company borrowing is pushing yields higher.
Another indicator is the “10-year, 10-year forward” yield: the rate investors require to hold a 10-year bond starting 10 years from now. It can capture the additional compensation investors demand for long-term exposure to Treasuries, including concerns about the path of federal debt and deficits.
If the AI boom were the main force lifting long-term yields, Brooks argues, this forward yield should have fallen alongside the 10-year and two-year yields. It did not. In his view, that divergence lends further support to the idea that a rising fiscal risk premium is at work. He says market moves around the midterm elections, together with a selloff in AI-related stocks, have helped separate the possible causes of higher long-term yields—and that fiscal pressure is a stronger explanation than AI financing.
Fiscal 2026 deficit reaches nearly $2 trillion
Final fiscal 2026 figures released by the Treasury Department last month showed the federal budget deficit widening to $1.99 trillion, up 12% from $1.78 trillion in fiscal 2025. Revenue rose 3% to $5.4 trillion, while spending increased 6% to $7.4 trillion. Social Security and Medicare were the largest spending categories. Interest on the national debt ranked third, ahead of defense and Medicaid.
Total interest expense on the national debt reached $1.36 trillion in fiscal 2026, at an average rate of 3.53%—more than twice the level before the Federal Reserve began its sharp tightening cycle in 2021. Net interest expense rose 8% year over year to $1.05 trillion, outpacing growth in total spending, federal revenue and gross domestic product. Real GDP grew about 2% and nominal GDP about 6%, both below the increase in net interest costs.
That works out to roughly $2.9 billion a day in net interest expense during fiscal 2026. The Peter G. Peterson Foundation estimates the amount at 3.2% of GDP, above the previous record set in 1991.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, has warned that higher interest costs add to debt, while rising debt can in turn push up rates and interest payments. She has urged Washington to act sooner, noting there is no simple fix. The market debate is whether the widening US deficit and mounting interest bill are already showing up in the long-term returns investors demand to hold Treasuries.