In 2025, the yield on longer term US Treasuries briefly rose above 5%. That might not sound dramatic at first glance, but it carries major implications for the economy, the government, and financial markets. When the cost of borrowing for the US government reaches that level, it starts to squeeze the entire system.
Right now, the national debt has passed $36 trillion. That is not just a big number. It matters because higher yields mean the government has to pay more interest on every dollar it borrows. With a growing share of tax revenue going toward interest payments, there is less room to fund everything else. That includes infrastructure, defense, Medicare, education, and anything else the public expects. The higher the yield, the tighter the government’s budget gets.
There are two key reasons why yields are climbing this year. First, inflation remains sticky. The Federal Reserve has been hesitant to lower rates quickly, and investors expect inflation to stay elevated longer than previously thought. Second, foreign countries have been selling US Treasuries, partly due to rising geopolitical tensions and partly as a response to new tariffs. This foreign selling puts pressure on bond prices and pushes yields up.
The impact is not limited to Washington. Treasury yields affect everything. Mortgage rates rise. Auto loans and credit card rates get more expensive. Companies face higher costs when they borrow to expand or invest. That slows the economy down. People spend less. Businesses hesitate. Job growth softens. The longer yields stay high, the more drag we feel across all sectors.
Yes, Treasury yields are closely connected to interest rates and inflation. When inflation expectations rise, investors demand higher yields to compensate for the loss of purchasing power. The Federal Reserve responds to inflation by raising short term interest rates. Longer term Treasury yields reflect both those rate expectations and the overall outlook for growth and inflation. It is all part of the same chain reaction.
Now the big question. Could this lead to a financial crisis? It depends on how things play out. One risk is that rising interest payments could start to overwhelm the federal budget. If investors lose confidence in the government’s ability to manage its debt, that could rattle the entire bond market. Another risk is that high yields hurt banks and financial institutions that hold a lot of long term bonds. We saw something similar happen back in 2023 when several regional banks failed after taking losses on their bond portfolios. A third scenario would involve a freezing of credit markets. If yields spike too fast and lenders panic, companies could suddenly find themselves unable to refinance debt or access short term funding. That is how small cracks can turn into full blown financial stress.
It is also worth watching the massive wave of debt that needs to be refinanced soon. Over $9 trillion of federal debt is maturing in 2025. Rolling that over at today’s yields would raise borrowing costs significantly and add more strain to an already stretched budget.
So when Treasury yields cross 5%, it is not just a number. It is a pressure point. It tells us the cost of money is going up and that the financial system is being pushed to adjust. Whether that adjustment is smooth or chaotic depends on how long yields stay elevated and how prepared the system is to handle it.