The global post-Labor Day selloff in long-term bonds hit the pause button on Sept. 3. But mounting fiscal pressures in the United States and elsewhere remain a threat to international debt markets.
The yield on the 30-year U.S. Treasury bond briefly touched 5 percent but retreated following the release of disappointing labor market data. It finished the session down 8 basis points at 4.891 percent.
A worse-than-expected reading reinforced the likelihood of the Federal Reserve cutting interest rates to support the “maximum employment” side of its dual mandate, according to Giuseppe Sette, president of artificial intelligence market research firm Reflexivity.
The latest data reflected “the lingering effects” of the Fed’s 2022–2023 rate-hike cycle “and uncertainty from ongoing trade tensions that are paralyzing hiring decisions,” Sette said.
“The weaker-than-expected data reinforces the Fed’s dovish pivot, with markets now pricing in a 92 [percent] probability of a 25 basis point rate cut at the September meeting, as policymakers increasingly acknowledge that downside risks to employment are mounting,” he said in a note emailed to The Epoch Times.
The Federal Open Market Committee has left the federal funds rate—a key policy interest rate that influences business, consumer, and government borrowing costs—unchanged in a target range of 4.25 percent to 4.5 percent since January.
That said, investors have been widely anticipating the Fed restarting its rate-cutting cycle to stimulate the U.S. economy, mainly the national labor market. This would, on paper, result in lower yields—both short- and long-term.
However, the across-the-board spike in Treasury yields during the return from the holiday long weekend was ignited by concerns surrounding the U.S. government’s fiscal health.
Wall Street signaled that it is afraid of Washington potentially repaying the $131 billion in tariff revenue collected so far this fiscal year and forgoing trillions of dollars in new income.
This fear arises from the U.S. Court of Appeals for the Federal Circuit’s 7–4 ruling that most of President Donald Trump’s high reciprocal tariffs are illegal and that only Congress can authorize levies.
“The core congressional power to impose taxes such as tariffs is vested exclusively in the legislative branch by the Constitution,” the court said. “Tariffs are a core congressional power.”
Despite the market fallout from the court’s decision, one expert says the tariff ruling does not matter as much as some investors may think.
Jeff Buchbinder, chief equity strategist at LPL Financial, said in a note emailed to The Epoch Times that even if the Supreme Court upholds the court’s ruling, a majority of the administration’s tariffs “will stick in the long term.”
“Our most important takeaway from this latest development is that the Trump administration has a backup plan,” Buchbinder said. “That plan could take a couple of different forms, but we believe most of these tariffs can be put back into place even if the Supreme Court rules they are illegal.”
Still, a lot is at stake for the federal government’s fiscal outlook.
Last month, S&P affirmed an “AA plus” credit rating for the United States, noting that “meaningful” tariff revenues will offset potential fiscal deterioration from tax cuts and spending increases.
“Amid the rise in effective tariff rates, we expect meaningful tariff revenue to generally offset weaker fiscal outcomes that might otherwise be associated with the recent fiscal legislation, which contains both cuts and increases in tax and spending,” the rating agency stated in an Aug. 19 report.
Around the World
Long-term bond yields have also been surging globally as investors have been spooked by deteriorating fiscal health among European governments.The 30-year UK government bond yield finished the Sept. 3 trading session at about 5.61 percent, the highest level since January 1998.
The 30-year German government bond yield reached a 14-year high of 3.37 percent. The 30-year French government bond yield rose to its highest level in nearly 20 years, reaching 4.45 percent.
Even in Japan, the yield on the government’s 30-year bond has been rising to levels never seen, reaching 3.27 percent.
Over the past two decades, governments worldwide have been accumulating substantial debt. The fierce appetite for debt, supported by an era of low interest rates, has been fueled by multiple crises, including the global financial crisis and the coronavirus pandemic.
To keep up with their spending, governments overseas have issued more long-term debt, which could potentially cause supply to outpace demand, lifting yields even higher.
Higher borrowing costs, stemming from demands for higher yields, are also increasing refinancing risks for sovereign and corporate issuers.
“In recent years, a significant amount of debt has been refinanced at higher yields compared to the original issues,” the report stated.
“As a result, interest payment to GDP ratios increased in about two-thirds of OECD countries in 2024 and reached 3.3 [percent], an increase of 0.3 percentage points compared to 2023. This means spending on interest payments is greater than government expenditure on defence in the OECD on aggregate.”
While demand has yet to crater, Institute of International Finance analysts said “winds of change” are forming across global financial markets, caused by worldwide trade tensions and potential supply-chain disruptions.
