Yields are soaring! U.S. debt is approaching the “Oh Shit moment” warned of by economists.

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The triple pressures of debt, inflation, and populism are reshaping the interest rate landscape of the U.S. and global bond markets, and this storm may have been long overdue.

The yield on the U.S. 30-year Treasury hit a 19-year high of 5.18% this week, while the 10-year yield rose to 4.67%. Greg Ip, chief economics commentator for the Wall Street Journal, pointed out in his latest column that the real question is not why yields have surged in the past week, but why this hasn’t happened sooner. The dangerous combination of debt, inflation, and populism is locking in upward pressure on long-term interest rates as a structural trend for the coming years.

He reposted a warning by Marc Goldwein, analyst at the Committee for a Responsible Federal Budget, on social media, who stated clearly: "We have reached what economists call the ‘Oh Shit moment’."

If current interest rates persist, Goldwein’s estimates show U.S. debt will increase by $2 trillion, interest payments will devour 30% of federal revenue, U.S. mortgage costs will rise by $96,500, and by 2029 rates will exceed economic growth (R>G), with the gap widening to 75 basis points by 2036—a classic signal of a debt spiral starting. This series of figures is forcing bond investors to reprice long-term risk.

Debt Out of Control: Unprecedented Deficit Scale

Greg Ip notes that before 2020, governments at least nominally upheld fiscal discipline. Since then, nearly every economic shock has been met with large-scale borrowing.

After the Biden administration’s fiscal stimulus in 2021, the Trump administration is expected to launch massive tax cuts in 2025. The Trump administration projects this fiscal year’s federal budget deficit will expand 16% to $2.1 trillion, while seeking a record $1.5 trillion defense budget. Meanwhile, Trump proposes suspending the federal gasoline tax, which the Committee for a Responsible Federal Budget estimates would result in $3.5 billion in monthly fiscal losses.

From 2023 to 2026, the U.S. fiscal deficit as a percentage of GDP will average 6.2%—a level only seen in U.S. history during wars, recessions, or emergencies, far higher than the 4.8% average from 2010 to 2019 and the 2.3% average from 2002 to 2007.

The U.S. is not alone. Japanese Prime Minister Sanae Takaichi recently hinted at a new fiscal budget to subsidize households hit by rising energy prices, which directly pushed up Japanese government bond yields. In the UK, the Labour left strongly resists Prime Minister Starmer’s spending reduction plan. Manchester Mayor Andy Burnham openly claimed the UK should not be ‘bound by bond markets,’ and he is seen as a potential challenger to party leadership, a prospect that has quietly pushed up UK government bond yields.

“One-Off Inflation Shocks” Continue to Accumulate

Greg Ip reviews the fundamentally different inflation logic before and after 2020.

Before 2020, major economic events—China joining the WTO, the U.S. subprime crisis, the eurozone debt crisis, the shale oil revolution, early COVID—generally suppressed inflation. In that era, central banks struggled with inflation persistently below the 2% target, kept rates near zero, and bought bonds on a large scale, making bonds a “insurance asset” against stock market downturns.

After 2020, the situation completely reversed. Supply chain disruptions, Russia-Ukraine war, Trump tariffs, and closure of the Strait of Hormuz—each shock pushed inflation up. People saw these as ‘one-off factors,’ expecting inflation would naturally fall back to 2%.

But Greg Ip raises a more worrying hypothesis: What if these shocks are not accidental, but a systemic symptom of a world more exposed to supply shocks due to war, geopolitical struggles, protectionism, populism, and extreme weather? Once the public forms expectations of lasting inflation, central banks will be forced to hike rates repeatedly, the ‘insurance’ nature of bonds will disappear, and investors will naturally demand higher compensation for holding them.

The Vicious Cycle of Debt and Inflation

Even more worrying is that deficits and inflation are not independent of each other, but may form a mutually reinforcing closed loop.

Rising living costs erode politicians’ approval rates, making them increasingly unwilling to cut benefits or raise taxes, further aggravating deficits. If the Fed is forced to hike rates multiple times, rising interest payments will further expand the deficit. The Committee for a Responsible Federal Budget estimates that if the recent interest rates persist for a year, the accumulated added burden of deficits will reach $200 billion over a decade. Worse, politicians may pressure central banks to prevent rate hikes, planting the seeds for higher inflation.

The new Fed Chairman Kevin Warsh, who will officially take office this Friday, originally hoped for AI-driven productivity improvements to open a window for rate cuts. Currently, the labor market has not shown obvious cost pressures, supporting this view. Surprisingly, despite high debt, tariff shocks, rising oil prices, and persistent pressure from Trump on Fed independence, bond investors’ medium- and long-term inflation expectations remain relatively mild, still expecting inflation to return to about 2% in the coming years.

This is a vote of confidence in Warsh by the market. But Greg Ip bluntly says that the price of delivering on this trust may be maintaining rates at levels higher than he and Trump expect. And that is exactly the price demanded by the dangerous combination of debt, populism, and inflation.

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