G-20 Inaction on Deficits Leaves Yields Elevated as Debt Tops $40 Trillion

The G-20 wrapped up its Asheville summit without a plan to close widening fiscal deficits, leaving two-year Treasury yields near 4.36 percent and investors bracing for higher-for-longer rates as US gross national debt tops $40 trillion.

"Mounting fiscal pressures, as evidenced by rising bond yields, and a stalled disinflation process — they are sources of worries both for markets and for policymakers," Kristalina Georgieva, managing director of the International Monetary Fund, told reporters before the meetings.

The summit's lack of a concrete fiscal or inflation response landed as markets already priced a hawkish turn. Two-year US Treasury yields stood at 4.36 percent after rising almost 12 basis points on Friday, while the 30-year yield held above 5.2 percent. Japan's Nikkei fell 2.1 percent, South Korea's benchmark declined 2.4 percent and MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.7 percent as higher yields and geopolitical uncertainty weighed on risk appetite.

The stakes are acute for the United States, where federal debt is growing about three times as fast as the overall economy and interest payments now consume more than a quarter of all government revenue. Treasury Secretary Scott Bessent argued the answer is growth. "The world is awash in debt, and the only way for us to get out of this is to grow our way out of this," he said. Fiscal watchdogs acknowledge growth helps but doubt it is a cure-all, and the GOP tax cuts last year added to the borrowing burden.

The inflation side of the equation is no less fraught. The US-Iran war, which began Feb. 28, has pushed Brent crude to about $89 a barrel and West Texas Intermediate above $84, reviving concerns that a prolonged energy shock could slow disinflation and delay rate cuts. The Strait of Hormuz handles roughly a fifth of global oil flows, and efforts to reopen it remain stalled. Markets raised the probability of a September rate increase to 57 percent after Federal Reserve Chair Kevin Warsh emphasized the need to control inflation, while JPMorgan chief US economist Michael Feroli said the September meeting remained "live."

The transmission is already visible across central banks. New Zealand's central bank is expected to raise rates for a second consecutive meeting, the Bank of Canada is expected to hold, and the European Central Bank faces renewed pressure for another hike in September. Gas prices in the US remain more than $1 a gallon above pre-war levels, with diesel almost $2 higher.

Geopolitical friction compounded the fiscal and inflation concerns. The US pressed allies to join Operation Economic Outcast, its effort to sever Iran's remaining links to the global economy, while Russia's finance minister attended in person for the first time since the Ukraine invasion and South Africa's delegation was excluded. Josh Lipsky, senior director of the GeoEconomics Center at the Atlantic Council, said the question some countries ask is whether the US is a source of stability or instability in the global economy.

The central question for markets has shifted from how quickly central banks can cut rates to whether an extended Iran-driven oil shock could force them to keep rates higher for longer — or reopen the possibility of further hikes. If the conflict stays contained and oil flows recover, the inflation impact could prove temporary. If the escalation disrupts energy supplies for an extended period, the disinflation process faces a significant new obstacle, with the next test coming from Friday's US payrolls report and consumer-price data due Sept. 11.

This article is for informational purposes only and does not constitute investment advice.