In the interplay between US fiscal policy and market logic, a paradoxical situation is unfolding: while the White House is striving to lower borrowing rates, the policies implemented by the government are inadvertently pushing up bond yields. Faced with President Trump's unchanging temperament, the American people are forced to confront a harsh reality: gaining breathing room for interest rates may come at the cost of an economic slowdown. This is not merely a game about the cost of capital, but a severe test concerning the very foundation of the US economy.

Policy backlash: US Treasuries face market indifference, yields remain high and difficult to fall.

In recent years, the investor structure of US Treasury bonds has undergone profound changes. With central banks and official reserve holders relatively reducing their bond purchases, the private sector's price sensitivity has significantly increased. Some global investors are beginning to avoid US Treasuries because the Trump administration's policy adjustments have worsened their investment economics. This has put the market in an awkward position: on one hand, there is the demand for funds driven by massive deficit spending; on the other hand, there is a surge in debt financing driven by the booming artificial intelligence industry. These two forces are fiercely competing for limited capital. Over the past six months, the yield on 10-year U.S. Treasury bonds has climbed by about 0.75 percentage points, recently hovering around 4.8%, a new high during the current Trump administration. Even the Treasury's plan to increase long-term Treasury repurchases to improve liquidity has failed to stem this upward trend. Investors are also pushing up risk premiums as they assess how new Federal Reserve Chairman Kevin Warsh will handle high inflation. Ludovic Subran, chief investment officer and chief economist at European insurance and asset management giant Allianz, stated bluntly that demanding loans to the U.S. naturally requires higher prices from the market; this is not politically motivated, but purely an economic imperative.

Risk Concerns: Soaring Deficits and Loss of Confidence Lead Investors to Seek Safe Havens

Subramaniam points out that soaring federal budget and trade deficits, the Federal Reserve's indifference to inflation, and the Treasury's intervention in the market are casting a shadow of credit risk over US Treasury bonds. While he doesn't believe the US will default directly, global investors like Allianz have had to pay higher costs to hedge against the risk. It is predicted that the US will reach its $41.1 trillion debt ceiling in late winter to summer of 2027, and the deteriorating fiscal situation is making investors hesitant to hold US Treasury bonds. Subramaniam frankly admits that considering inflation and hedging costs, there is no longer any profit in the US Treasury market, so this year Allianz decided not to seek longer durations for US Treasury bonds as it has in the past. This loss of confidence directly impacts the consumer end, pushing up the cost of living. US mortgage rates are approaching 6.8%, and the costs of consumer debt such as auto loans, which are linked to the 10-year Treasury yield, are rising in tandem, further burdening American families already struggling with the high cost of living.

Supply and demand dynamics: The double whammy of deficits and AI intensifies the battle for capital.

Political risks show no signs of abating. While falling oil prices may offer some solace, the prospect of ending the Iranian crisis remains bleak, and Washington lacks the political will to reduce the deficit. At the global finance ministers and central bank governors meeting in North Carolina, coordinated action to lower borrowing costs was not on the agenda, and countries instead found themselves in a stalemate of mutual blame. Meanwhile, the scale of US government borrowing continues to balloon. The Congressional Budget Office recently revised its deficit forecast for this fiscal year upward to $2.1 trillion, potentially exceeding 6% of GDP—a staggering amount of borrowing outside of a crisis. More alarmingly, the artificial intelligence wave is driving massive corporate debt issuance. JP Morgan estimates that the five major tech giants and companies like Nvidia have already issued approximately $320 billion in debt this year. Michael Cembalest, Chairman of Asset Markets and Investment Strategy at JP Morgan, points out that the massive debt issuance by mega-tech companies is creating a supply-demand imbalance on the long-term yield curve.

Economic Paradox: Is High Interest Rate Cause or Effect? The Dilemma of Growth and Cooling Down

While the financing demand driven by AI is seen as an economic bright spot, the overall economy is facing sluggish growth. Second-quarter US GDP grew by only 1.5%, below expectations, primarily attributed to a sharp decline in immigration due to the Trump administration's crackdown on immigration. The labor market also exhibits a rigid pattern, with companies reluctant to easily add or remove jobs. Last Friday's non-farm payroll data showed that although 162,000 new jobs were added, market activity remained insufficient. Competition in the bond market might force innovation, but the real cost is equally heavy. The yield on 10-year Treasury Inflation-Protected Securities (TIPS), which measures inflation-adjusted returns, has surged 67 basis points in the past six months, reaching 2.43% last Thursday, while inflation expectations have remained stable during the same period. New York Fed President John Williams stated last Wednesday that the rise in real yields reflects more the strength of the economy itself; economic conditions determine financial conditions, not the other way around. The underlying message of this analysis is worrying: to lower borrowing costs, perhaps the only option is to wait for the economy to cool down proactively , but this is undoubtedly a regrettable outcome that no one wants.

Conclusion

In conclusion, the current high-interest-rate predicament in the United States is actually the result of a combination of policy uncertainty, out-of-control fiscal deficits, and the siphoning of industrial capital. The White House's attempts to intervene in the market appear feeble in the face of economic laws. With global capital increasingly hedging against US Treasury bonds and the AI industry's enormous demand for funding, the US is facing an unprecedented battle for capital. To break this deadlock, market regulation alone is unlikely to be effective; finding a balance between lowering interest rates and maintaining growth will be a long-term challenge for the US.