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For decades, the U.S. Treasury market has been regarded as the bedrock of global finance — a safe haven in times of turmoil, and the deepest, most liquid bond market in the world. Yet in 2025, cracks are starting to appear in that seemingly unshakable foundation.

With U.S. government debt climbing to historic levels, interest payments consuming an ever-larger share of federal revenue, and foreign demand for Treasuries showing signs of strain, investors and policymakers alike are beginning to ask an uncomfortable question: Is America’s bond market on the verge of a dangerous debt death spiral?

This article examines the forces at play: soaring deficits, rising rates, waning foreign appetite, and the risk of a self-reinforcing feedback loop that could threaten not just U.S. fiscal health but global financial stability.

Debt at Historic Highs: How Did We Get Here?

The U.S. national debt now stands at a staggering $42 trillion, nearly 130% of GDP — a peacetime record. Even more alarming is the pace of borrowing: in the last decade alone, the federal debt has more than doubled, fueled by pandemic stimulus, tax cuts, military spending, and rising entitlement obligations.

While markets largely shrugged off ballooning deficits for years thanks to ultra-low interest rates, the tide has turned. Since 2022, the Federal Reserve has raised its benchmark rate to over 5% in a bid to tame inflation, pushing Treasury yields higher and dramatically increasing the cost of servicing the debt.

In fiscal 2025, interest on the debt is projected to exceed $1.2 trillion — more than the United States spends on defense and nearly 15% of all federal outlays. This trajectory is unsustainable, warn economists, and risks crowding out spending on other priorities or leading to even higher borrowing to service past borrowing.

“This is the definition of a fiscal trap,” says Maya Patel, chief U.S. economist at Vanguard. “Higher debt leads to higher interest payments, which means even more borrowing, creating a vicious cycle that’s hard to escape.”

A Shifting Demand Landscape: Who Will Buy?

For decades, America has relied on robust demand for its debt — from foreign central banks, institutional investors, and even individual savers — to fund its deficits at low cost. But that demand is no longer guaranteed.

Foreign holdings of U.S. Treasuries peaked in 2013 and have declined steadily as a share of total debt. China, once the largest foreign holder, has trimmed its Treasury portfolio by over 30% in the past five years amid geopolitical tensions. Japan, now the top foreign holder, has also slowed purchases as it contends with its own rising yields and currency pressures.

Meanwhile, the Federal Reserve, which at one point owned more than $8 trillion in Treasuries thanks to years of quantitative easing, has reversed course and is now actively shrinking its balance sheet.

This leaves private investors and domestic institutions to absorb the growing supply — but at higher yields to entice them. In 2025, the Treasury Department has already faced several weak auctions, with bid-to-cover ratios falling and primary dealers forced to take on more supply than they’d like.

“This is a dangerous game of musical chairs,” warns David Rosenberg of Rosenberg Research. “If demand continues to falter, yields will have to rise even further, which only exacerbates the debt problem.”

Feedback Loops and the Death Spiral Risk

At the heart of the death spiral concern is the potential for a self-reinforcing feedback loop. Rising debt leads to higher borrowing needs, which pushes up yields, increasing the cost of servicing the debt, which leads to even more borrowing — and so on.

This dynamic is not just theoretical. Economists Carmen Reinhart and Kenneth Rogoff have documented how countries with debt-to-GDP ratios above 100% tend to experience slower growth and rising borrowing costs, which further weaken fiscal sustainability.

For the United States, the risk is compounded by the fact that much of its debt is short-term, meaning it must be refinanced frequently at current market rates. As older, lower-yielding debt matures, it is replaced by new debt at higher rates, ratcheting up interest expenses.

“If left unchecked, the U.S. could face a classic debt spiral where rising rates and rising debt feed on each other,” says Laura Wong, senior strategist at BlackRock. “That would force painful fiscal adjustments — either through spending cuts, tax hikes, or inflationary monetization of debt.”

Market Sentiment: Still Resilient, But Cracks Show

Despite the dire warnings, the Treasury market remains resilient — for now. U.S. government bonds are still considered the world’s safest assets, backed by the full faith and credit of the U.S. government and denominated in the world’s reserve currency.

In times of global uncertainty, demand for Treasuries often increases, pushing yields down. Indeed, the 10-year Treasury yield, while elevated at 4.7%, is still far below levels seen in previous eras of inflation or fiscal strain.

Yet there are signs that investor confidence is fraying. Credit rating agencies have begun to sound the alarm: Fitch downgraded the U.S. from AAA to AA+ in 2023, citing governance and fiscal concerns, and Moody’s has warned of similar action if no credible fiscal plan emerges.

The yield curve remains inverted — a classic recession signal — and volatility in Treasury markets has picked up markedly in recent months, with several days of unusually sharp moves in yields and weak auction results.

“There’s still a deep pool of buyers for Treasuries,” notes Bill Gross, former PIMCO chief. “But that pool isn’t infinite. At some point, markets will demand either higher returns or credible fiscal reform — or both.”

The Inflation Wildcard

Adding to the challenge is the risk of inflation. While price pressures have eased from their post-pandemic peaks, they remain above the Federal Reserve’s 2% target. Should inflation reaccelerate, the Fed may have to keep rates higher for longer, further exacerbating debt service costs.

Some analysts warn that the temptation for policymakers to “inflate away” the debt — allowing higher inflation to erode the real value of outstanding obligations — could grow if fiscal consolidation proves politically impossible.

But such a strategy risks destabilizing the dollar and undermining global confidence in U.S. assets. Already, some central banks have been diversifying reserves into gold and other currencies, wary of overdependence on U.S. debt.

Lessons From Abroad: Not Immune to Crisis

Skeptics argue that the U.S. cannot face a debt crisis because it prints the world’s reserve currency and controls its own monetary policy. But history offers cautionary tales.

The U.K. in the 1970s, Italy in the 1990s, and Greece in the 2010s all suffered severe fiscal crises when investor confidence in their bonds eroded. In each case, rising borrowing costs forced painful austerity measures and triggered recessions.

The U.S. enjoys unique advantages, but those advantages are not limitless. As former Fed chair Alan Greenspan once quipped: “The United States can pay any debt it has because we can always print more money. But that doesn’t mean there are no consequences.”

Policy Options: How to Avert a Spiral

Avoiding a debt spiral will likely require a combination of fiscal discipline, economic growth, and prudent monetary policy.

On the fiscal side, lawmakers must grapple with the politically unpopular task of restraining spending and reforming entitlement programs, which represent the largest and fastest-growing part of the federal budget.

On the revenue side, closing tax loopholes and broadening the tax base could help raise revenues without unduly slowing growth.

Finally, policies that boost long-term productivity — through investment in education, infrastructure, and innovation — can help grow the economy faster than the debt, improving sustainability.

“Debt sustainability is about more than just the numerator,” says Douglas Elmendorf, former CBO director. “If you can grow the denominator, you can stabilize or even reduce debt-to-GDP over time.”

Conclusion: A Tipping Point Approaching

The U.S. bond market remains the cornerstone of the global financial system, and Treasuries are still viewed as the ultimate safe asset. But the trends in 2025 are flashing warning signs that cannot be ignored.

Rising debt, higher interest costs, and waning foreign demand have created the conditions for a potential feedback loop that could spiral out of control if left unchecked.

For investors, that means staying vigilant. Higher yields may present opportunities, but also reflect greater risk. For policymakers, it means facing hard choices now rather than waiting for a true crisis to force action.

The good news is that the U.S. still has time, resources, and credibility to correct course. But the longer it waits, the narrower the options become — and the higher the cost of adjustment.

Takeaways for Investors and Policymakers:

✅ U.S. debt is at record highs and growing unsustainably, with interest costs consuming more of the budget.

✅ Foreign demand for Treasuries is weakening, raising borrowing costs further.

✅ Market sentiment remains resilient but shows signs of strain — with volatility rising and downgrades looming.

✅ Avoiding a debt spiral will require difficult fiscal reforms, revenue enhancement, and pro-growth policies.

✅ For investors, higher yields may offer opportunities, but caution is warranted given rising systemic risk.

The U.S. has weathered many storms, but ignoring the mounting fiscal challenge could turn today’s warning signs into tomorrow’s crisis. The time for action is now.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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