WASHINGTON DC: US fiscal deterioration is increasingly becoming a key risk for global markets, with higher Treasury yields potentially putting pressure on equities and constraining the Federal Reserve’s policy flexibility, Jefferies said in its latest research report.

The brokerage said the US public debt has crossed the $40 trillion milestone even as the fiscal deficit continues to widen, creating an environment in which long-term borrowing costs could remain elevated.

The US fiscal deficit rose to $432 billion in July, the highest monthly deficit since March 2021 and a record for the month. The deficit for the first 10 months of the fiscal year reached $1.799 trillion, already exceeding the full-year FY25 deficit of $1.775 trillion. The annualised fiscal deficit-to-GDP ratio also increased to 6.1 per cent in July from 5.7 per cent in June.

Jefferies expects fiscal deterioration to continue putting upward pressure on long-term Treasury yields. Nominal US GDP growth has averaged 5.9 per cent over the past 12 quarters, and the brokerage argues that nominal growth running above the 10-year Treasury yield is a signal that yields should move higher.

Recent auctions underline the pressure: the 10-year Treasury auction yield reached 4.683 per cent, the highest since 2007, while the 30-year auction yield climbed to 5.216 per cent, its highest since 2001.

The pressure is compounded by rising government spending and weakening receipts. Federal government outlays surged 21.7 per cent year-on-year in July, while receipts declined 1.3 per cent.

National defence spending increased 19.9 per cent during the month. At the same time, net interest and entitlement spending rose to 98.4 per cent of annualised government receipts, highlighting the growing fiscal burden.

Going ahead, the key market trigger will be the 10-year Treasury yield crossing 5 per cent, which Jefferies sees as a potential near-term risk for equities. The yield was around 4.69 per cent after recently touching 4.746 per cent. Treasury Secretary Scott Bessent’s decision to at least double long-term Treasury buybacks could help contain the rise, but the underlying fiscal pressures remain.

Jefferies also noted that the Treasury’s growing reliance on short-term funding and intervention to support the long end highlights the constraints facing monetary policy. The brokerage believes the fiscal backdrop is ultimately supportive for gold, while higher-yield risks could make equity valuations increasingly vulnerable if the 5 per cent Treasury threshold is breached.