Record national debt and the Treasury’s attempt to counter it.
It was a somber milestone America achieved this week, as the U.S. national debt crossed the $40 trillion mark. Between the 2008 financial crisis, massive emergency spending during the COVID-19 pandemic in 2020 and 2021, and growing mandatory spending on Social Security, health care and interest on the national debt, America is in a hole.
We have been running deficits for the last 26 years, and have lacked the political will needed to address the well-known structural challenges we have in our budget—too much spending and not enough tax revenue.
When Congress returns from recess, it will evaluate a stopgap spending measure to prevent a partial government shutdown on Sept. 30 while considering other administration spending priorities. Meanwhile, the term premium that investors demand to hold long-duration U.S. bonds hit 5.32% on Aug. 17 (its highest level since 2007) in a sign investors want to be paid more to take the credit risk of U.S. government debt.
When long-end yields move to those levels, it means higher borrowing costs for all of us—on home mortgages and equity loans, but also generally more on all borrowing costs for credit cards, student loans and you name it. It also very often creates a direct headwind for equities, especially the high-growth, high-valuation names that have led this market.
To blunt the impact of the national debt news and rising investor anxiety, U.S. Treasury Secretary Scott Bessent announced a significant expansion of the Treasury’s long-end bond buyback program—doubling the per-operation cap to at least $4 billion in what markets initially read as a positive attempt to keep long-end bond yields under control.
By issuing short-term T-bills and buying long-dated bonds, the Treasury will shorten the weighted-average maturity of outstanding U.S. debt to try to ease pressure on long-term interest rates. If you recall, this is similar to actions taken by the Federal Reserve back in 2011 in what was known as Operation Twist.
But there are a couple of differences now versus 2011 and between the Fed’s and Treasury’s facilities to point out. Back then, we were in a very different economic environment. It was a period where core inflation was running right around the Fed’s 2% target and unemployment was still at 9%, so the measure was meant to stimulate the economy by bringing down long-end yields to make borrowing—and spending—more affordable. Today, inflation remains above target, employment is near full, and deficits are substantially larger.
Another key difference is that the Fed has no limits on its balance sheet—during Operation Twist, they could come out with an unlimited program to really boost markets. The Treasury, of course, has limits. While Secretary Bessent didn’t put a cap on the overall operation, the expected incremental buying is only about $28 billion, total. That’s a far cry from the $400 billion in Fed purchases we saw over a 15-month period starting in 2011.
So while this move from Treasury shares the same logic as Operation Twist, it’s likely not large enough to have the same impact. That may be why the bond market ultimately shrugged off the news, bringing us back to roughly the same yield levels as before the announcement. The market is saying the buyback is too tiny and only addresses the symptoms and not the underlying cause of the abyss into which we are staring.
Oh, and did I mention that U.S. Treasury debt issuance is now also competing with the $159 billion of borrowing in the public markets by the AI hyperscalers year-to-date in 2026? They previously issued an average of $28 billion of corporate bonds a year from 2020 to 2024, which jumped to $121 billion in 2025 and may reach as high as $400 billion in 2027.
Over the course of my career, I have dreaded when clients asked questions on this topic. While I could opine and theorize about why financial markets were not having material reactions to the rising national debt and structural deficits, it was unsatisfactory to all of us when, in truth, it was a problem people were pushing off into the future. It is a problem our kids and grandkids will inherit, added to the list of the damage to our environment, drained natural resources, cybersecurity threats, and fractured and fraught global relationships.
There are no easy answers to the problem of debt and ongoing deficit spending now and we may no longer be able to kick the can down the road. It is a risk for portfolios and could curb future returns.
At times like these, diversification becomes even more important: Growth is as essential a solution here as risk management. Maintaining that balance, matched to your time horizon and goals, will be critical if we are walking the line in a world where what was once a medium- or long-term issue is now on our doorsteps.
Written by a human.