U.S. equities have posted robust year-to-date returns. Through Sept. 9, the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite have risen 9%, 11.6% and 13% respectively. Beneath the buoyant equity performance, however, structural strains in the U.S. economy and equity markets are surfacing in the bond market, sending cautionary signals for investors.
U.S. Treasury Secretary Scott Bessent announced the Treasury would boost its long-dated bond buyback program to as much as $6 billion, tripling its regular size. The policy aims to calm bond-market volatility and pull down long-end yields. In theory, bond repurchases lift bond prices and suppress yields. Yet long-term Treasury yields climbed after the announcement; the Treasury’s market intervention failed to deliver its intended outcome.
Since the start of President Trump’s second term, he has repeatedly pressed the Federal Reserve to cut rates to 1% or lower. The Fed has delivered six reductions to the federal funds rate since September 2024, bringing the target range to 3.50%–3.75%. Even after multiple rate cuts, the yield on the 30-year U.S. Treasury briefly topped 5.3%, hitting a 19-year high, while the 10-year yield neared levels last seen during the financial crisis. The surge forced the Treasury to ramp up its long-dated bond buybacks.
Deep structural headwinds undermined the intervention. U.S. federal public debt surpassed $40 trillion in mid-August. With fiscal spending unchecked and annual deficits persistently above $1 trillion, investors demand a higher risk premium to hold long-duration Treasuries. Though roughly $950 billion sits in the Treasury’s general account, the sum is too small to offset the fundamental forces pushing long-end yields upward.
Meanwhile, policy-fueled inflation remains above the Fed’s 2% long-run target, and bond markets are pricing in the risk of renewed Fed rate hikes. Federal Reserve Chair Kevin Warsh removed forward guidance from FOMC statements, reducing policy transparency and amplifying bond market volatility. Traders have lifted long-end yields to price this uncertainty. A continued rise in long-dated yields would raise corporate borrowing costs and potentially slow investment in critical artificial intelligence infrastructure.
For four decades, global long-term interest rates trended lower, and U.S. Treasuries served as the primary hedge against equity drawdowns. During economic downturns and stock selloffs, safe-haven inflows lifted bond prices, creating a reliable negative correlation between stocks and bonds. The multi-decade downtrend bottomed in 2020 and broke decisively in 2022. That year, major central banks tightened monetary policy to fight inflation, triggering simultaneous declines in equities and bonds and erasing Treasuries’ protective function. The shift is global: 30-year government bond yields in Canada and other economies have also entered an upward cycle.
Economic growth is not the core driver of the current yield surge. Most Western economies have seen muted growth over the past two years. While U.S. GDP growth has mostly stayed above 2% over the last three years, it is not the dominant factor pushing Treasury yields higher. Instead, sticky inflation has lifted inflation expectations. Though inflation has fallen from its 2022 peak, progress has been slow, leaving investors worried that prices may stay above the central bank’s target.
Elevated public debt adds to market concerns. IMF data shows U.S. government debt-to-GDP stands at 123%, while Canada’s gross government debt-to-GDP ratio reaches 114%. Higher interest rates directly raise debt-servicing costs for governments. During the rate downtrend starting in the 1980s, fiscal expansion was manageable as interest expenses stayed contained. In today’s rising-yield environment, government debt service burdens are climbing sharply.
The macro backdrop that underpinned global asset pricing for 40 years has reversed. Markets now price assets against a mix of high public debt, sticky inflation, tepid growth and persistent fiscal spending. Should the economy weaken sharply and equities correct materially, Treasuries may see a marginal improvement in appeal. Still, investor anxiety over fiscal expansion and inflation has risen markedly. Concurrent stock and bond declines may become a recurring risk, marking the end of the 40-year classic stock-bond hedging framework.
