Investment strategist Lyn Alden warns that rising US debt-servicing costs and elevated Treasury yields are increasingly constraining the Federal Reserve, with the pressure likely to be felt through inflation, housing and borrowing costs rather than an abrupt debt crisis
Rising US bond yields are exposing a deeper problem in the world’s largest economy, according to investment strategist Lyn Alden, who says the growing cost of servicing government debt is increasingly limiting what the Federal Reserve can do about inflation.
Speaking with David Lin on The David Lin Report, Alden argued that the United States is moving further into what economists call “fiscal dominance”, where the size of government debt and interest payments begins to constrain monetary policy.
Her comments come as US Treasury yields trade near levels not seen for more than two decades. The 10-year Treasury yield ended 2 October at about 5.28 per cent, while the 30-year rate was around 5.63 per cent. The rise persisted despite a weaker September jobs report, which showed the US economy added just 29,000 jobs, well below expectations, while unemployment edged up to 4.2 per cent.
Alden said investors should not assume current long-term yields represented an extreme dislocation.
“Even 6% yields on the 10-year wouldn’t be a particularly steep yield curve,” she said. “It wouldn’t be unusually steep.”
She stressed that she was not forecasting a 6 per cent 10-year yield, saying her base case did not necessarily take rates that high. Her argument was that such a level was possible without the yield curve itself becoming historically extreme. Much of the recent concern has focused on whether investors are losing confidence in long-dated US government debt.
US debt squeeze: Alden says higher-for-longer rates are steadily pushing up Washington’s interest bill, leaving the Federal Reserve with fewer options to fight inflation.
Alden said the evidence did not yet support the idea that Washington had “lost control” of the long end of the bond market. Instead, rates were high across much of the curve as investors adjusted to the prospect that borrowing costs could remain elevated for longer.
The larger problem, she argued, was what happens if those rates persist.
The US had about $40.18 trillion in total public debt outstanding at the end of August, of which about $32.41 trillion was held by the public. Marketable debt included roughly $7.25 trillion in Treasury bills, $16.22 trillion in notes and $5.53 trillion in bonds.
Higher market rates do not immediately reprice all of that debt because much of it was issued earlier at lower rates. But as securities mature and Washington refinances them, higher borrowing costs progressively feed into the federal interest bill.
Federal government interest payments were running at an annualised rate of about $1.28 trillion in the second quarter of 2026, according to US Bureau of Economic Analysis data.
Alden described the process as less a sudden debt crisis than a persistent deterioration.
“Expense well over a trillion dollars a year is already a problem,” she said. “It’s not a problem in the sense that anything is going to break anytime soon, but it’s just like a leaky bucket that’s just going to keep spilling out.”
She rejected the idea that there was a single interest-rate level at which the US government would suddenly become unable to pay its debts.
Instead, Alden said the danger was that rising interest costs could gradually force the Federal Reserve into increasingly difficult choices, particularly if it were eventually required to support the Treasury market while inflation remained above target.
“Above a certain point when you have all this interest expense, someone has to buy those bonds,” she said.
Two-speed economy: High yields are squeezing homebuyers, smaller businesses and household budgets, even as asset prices and sectors benefiting from government and AI spending remain strong.
That could eventually produce a situation where the central bank expands its balance sheet to support the bond market even while inflation remains too high, she said.
“When that happens, it’s not as though everything, it’s not like a house of cards just falls down instantly and we go bankrupt,” Alden said. “Instead you start to get basically emerging market characteristics in what is otherwise a developed economy.”
Those characteristics, in her view, could include persistently above-target inflation, weaker purchasing power and a central bank with less freedom to respond independently to economic conditions.
Alden described the result as an economy where asset prices can remain strong even as households feel increasingly squeezed.
“That’s why you have things like record high stock prices and near record low consumer sentiment,” she said. “Because the money/debt situation is like very slowly breaking.”
Housing would be among the areas most exposed if long-term yields continued to rise. Alden said a 6 per cent 10-year Treasury yield would probably push mortgage rates higher, further dividing existing homeowners from people trying to enter the market.
Homeowners who locked in cheaper long-term mortgages could remain relatively insulated, while wealthier cash buyers would also be less affected. Younger households dependent on mortgage finance would face a very different position.
“Young families looking to buy a home, you’re just completely shut out,” she said.
Small and medium-sized businesses would also be vulnerable because they generally refinance debt more frequently than large corporations, many of which locked in long-term funding when rates were lower.
Alden said this was contributing to what she described as a “two-speed economy”, with some sectors benefiting from government spending, AI investment and high asset prices while others were absorbing the effects of expensive credit and rising living costs.
“If you’re in tech, AI, healthcare, defence, you’re on the receiving side of deficits, you’re generally doing pretty good,” she said.
For households on middle and lower incomes, the picture was markedly different, particularly where groceries, fuel, insurance and healthcare consumed a larger share of earnings.
“The person finds themselves still employed, generally speaking, and yet saying it’s just harder this year than it was a year, two years, three years, four years ago because the cost of things have kind of gone up on average faster than wages,” Alden said.
The September employment report adds another complication for policymakers. Payroll growth slowed sharply, but the persistence of inflation and high energy costs means weaker employment does not automatically translate into substantially lower long-term rates. Treasury yields initially fell after the jobs report before reversing much of the move as investors returned their attention to inflation and fiscal concerns.
Alden also raised the possibility that, in a more extreme scenario, the Federal Reserve could eventually turn to yield curve control, effectively setting a ceiling on government bond yields and buying securities when necessary to defend it.
The US used such a system during and after the Second World War. From 1942, the Fed pegged short-term Treasury bill rates and capped long-term government bond yields at 2.5 per cent to help finance wartime borrowing. The arrangement was ultimately abandoned under the 1951 Treasury-Federal Reserve Accord as inflationary pressures intensified.
Alden called yield curve control a “nuclear” option because of the damage it could do to the central bank’s inflation-fighting credibility.
“If the Fed finds itself increasing its balance sheet while inflation is above target, it’s an awful look,” she said.
Her broader argument is not that a US sovereign default is imminent. Alden said failed Treasury auctions were not her expectation this year or next.
The risk, she argued, is slower and potentially more difficult to resolve: government borrowing remains large, debt continues to refinance at higher rates, interest payments rise, and the central bank gradually loses room to fight inflation without simultaneously worsening the government’s fiscal position.
“There are parts that can be changed based on political decisions and then there are parts that are very entrenched,” Alden said.
On the structural deficit problem, her conclusion was more succinct.
“Nothing stops that train.”
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