By Qudsia Bano

Rising long-term US Treasury yields are adding to global financing pressures, raising benchmark borrowing costs and creating tougher conditions for governments and businesses, particularly across emerging and developing economies. Total US debt has surpassed US$40 trillion for the first time, the Treasury Department said on Wednesday (Aug 19), renewing concerns over a looming fiscal crisis as rising spending on social programmes and interest payments increasingly outpaces government revenues constrained by tax cuts. Long-term Treasury yields surged to multi-decade highs.

On August 18, the 30-year yield hit about 5.33%, its highest since 2007. Recent auctions have also been expensive: the 10-year auction cleared at 4.683%, while the 30-year auction cleared at 5.216%, the highest auction yield since 2001. The increase carries global significance because US Treasury yields are widely used as benchmark rates for pricing longer-term financial assets and international borrowing. When investors can earn higher returns on relatively low-risk US government securities, other sovereign and corporate borrowers generally have to offer more attractive returns to compete for global capital.

The pressure is occurring alongside Washington's heavy financing requirements. The US Treasury expects to borrow $739 billion in privately held net marketable debt during the July-September quarter, $68 billion more than projected in May, followed by another $628 billion during the October-December quarter. The Congressional Budget Office has projected a $1.9 trillion federal deficit in fiscal year 2026, equivalent to 5.8% of GDP. Under its baseline projections, federal debt held by the public is expected to rise from 101% of GDP in 2026 to 120% by 2036, with growing interest payments contributing significantly to future deficits.

The combination of large fiscal deficits, substantial bond issuance and elevated Treasury yields has implications beyond the United States. Higher benchmark rates can increase refinancing costs, make new bond issuance more expensive and influence the availability and pricing of international capital. The International Monetary Fund has also highlighted these spillover risks.

In its 2026 assessment of the US economy, the Fund warned that higher public debt and deficits could place further upward pressure on long-term interest rates, tightening global financial conditions, increasing currency volatility and weighing on consumption and investment. Emerging and developing economies are particularly exposed because their sovereign and corporate borrowing costs generally incorporate a risk premium above international benchmark rates.

Even where domestic economic conditions improve, external financing can remain expensive if the underlying global cost of capital stays high. Higher US yields can also influence international capital flows. More attractive returns on dollar-denominated assets may encourage investors to allocate a larger share of their portfolios to US securities, making access to capital more selective for developing economies and potentially adding pressure on their currencies and financial markets.

Speaking to Wealth Pakistan, Dr Hamid Haroon, former Economist at the State Bank of Pakistan, said rising US Treasury yields effectively raised the global reference price of money. For emerging economies, he said, the impact was particularly important when governments and businesses sought to refinance maturing obligations, raise new external debt or return to international bond markets. Haroon said persistently high US yields could encourage global investors to favour dollar-denominated assets, requiring developing economies to offer higher returns to attract international capital.

Pakistan is among the emerging economies for which elevated global benchmark rates remain relevant. Higher US Treasury yields can raise the underlying cost of future sovereign bond issuance, commercial borrowing and private-sector foreign financing, although Pakistan's actual borrowing costs also depend significantly on domestic economic conditions and its sovereign risk premium.

Haroon said Pakistan could reduce its exposure to elevated global financing costs by strengthening foreign-exchange buffers, extending debt maturities where possible, limiting dependence on costly short-term external borrowing and improving macroeconomic credibility. Stronger fiscal and external fundamentals, he said, could help reduce the country-specific risk premium Pakistan pays above international benchmark rates, partially offsetting the impact of elevated US Treasury yields. The effects of higher benchmark rates also extend to corporate financing.

The Federal Reserve has reported that increases in Treasury yields have been accompanied by higher corporate bond yields, illustrating how movements in government borrowing costs can pass through to wider credit markets. With US federal debt approaching $40 trillion, substantial government financing requirements and long-term Treasury yields remaining above their levels at the start of 2026, global borrowing conditions remain under pressure.

For emerging and developing economies, including Pakistan, stronger fiscal management, improved external buffers and reduced dependence on expensive short-term financing could become increasingly important if elevated global interest rates persist.

Credit: INP-WealthPk