US fiscal deficit, rising Treasury yields emerge as key risks for financial markets: Jefferies

US total public debt rose 7.8 per cent year-on-year to USD 40.05 trillion on August 18, according to the report. At the same time, the US fiscal deficit continued to widen, with the monthly deficit rising to USD 432 billion in July, the highest deficit recorded for the month.

For the first 10 months of fiscal year 2026, the US deficit stood at USD 1.799 trillion, already exceeding the full-year FY25 deficit of USD 1.775 trillion. The annualised fiscal deficit-to-GDP ratio also rose to 6.1 per cent in July from 5.7 per cent in the 12 months to June.

Jefferies said, "The fiscal deterioration is clearly one of the forces putting upward pressure on long-term Treasury bond yields."

The pressure is visible in the US bond market. A USD 42 billion auction of 10-year Treasury notes on August 12 resulted in an auction yield of 4.683 per cent, the highest since 2007. A USD 25 billion 30-year Treasury auction on August 13 saw the yield rise to 5.216 per cent, the highest since 2001.

The 10-year Treasury yield subsequently rose to 4.746 per cent, while the 30-year yield reached 5.336 per cent, the highest level since June 2007. Jefferies noted that recent weak employment data and relatively benign inflation have not resulted in a sustained rally in long-term bonds.

The brokerage also highlighted the importance of foreign investors to US markets. Japan held USD 1.12 trillion in US Treasuries at the end of June, down from USD 1.24 trillion at the end of February. Foreign holdings of US equities, meanwhile, rose 24.5 per cent year-on-year to a record USD 24.5 trillion.

Jefferies identified a rise in Treasury yields as the key near-term risk for US equities, with 5 per cent on the 10-year Treasury yield seen as an important trigger.

"The near-term risk to equities is higher Treasury bond yields, with a move above 5% on the 10-year yield the obvious trigger point," the report said. (ANI)