Rising U.S. national debt, which has recently surpassed $40 trillion, and escalating global trade tensions are increasing economic and financial risks worldwide. Together, they are raising borrowing costs, weakening investor confidence, and encouraging foreign creditors to reduce their exposure to American assets. The cost of servicing this debt has also doubled, rising from 11 per cent of tax revenue in 2000 to 21.5 per cent in the first 10 months of the current fiscal year. This shift exposes vulnerabilities that could threaten the long-term economic stability of both the United States and the wider global economy.
A sell-off in global bond markets intensified about a week ago, as investors responded to energy-driven inflation, tighter monetary policy, and deteriorating fiscal conditions. One of the clearest signs of this shift was Japan's 10-year government bond yield (i.e., interest rate) reaching 3 per cent for the first time since 1996.
Rising yields in both the United States and Japan reflect growing anxiety about inflation, public debt, and the sustainability of government borrowing. Because bond yields move in the opposite direction to bond prices, higher yields signal weaker demand for government debt and increase borrowing costs for both governments and companies. Former International Monetary Fund chief economist Kenneth Rogoff, now a Harvard economics professor, has argued that while major crises such as the 2008 financial crash and the pandemic helped expand U.S. debt, the more significant issue today is the sharp rise in interest rates.
After years of near-zero returns, Japan's 10-year government bond yield has climbed to nearly 3 per cent. This rise may gradually draw capital back into Japanese assets. Real yields-the returns investors require after allowing for inflation-matter because they show the true borrowing cost once price increases are considered.
The scale of the shift is significant. For more than a decade, large central bank purchases of government debt helped keep yields unusually low, making a 3 per cent yield on 10-year Japanese government bonds seem unlikely. Japan's recent bond-market turbulence has, therefore, increased concern about broader risks to global markets, with potential exposure estimated at around $7 trillion.
National debt is the total amount the federal government has borrowed to cover accumulated shortfalls between spending and revenue. When spending exceeds revenue in a fiscal year, the government runs a budget deficit. To finance that deficit, it borrows by selling marketable securities, including Treasury bonds, bills, notes, floating-rate notes, and Treasury inflation-protected securities (TIPS). The national debt is the accumulated value of this borrowing, plus the interest owed to investors who hold these securities. Because recurring deficits are common, the national debt continues to grow over time.
Debt can also serve a useful purpose. Governments use it to fund infrastructure projects, and it supports monetary policy because the U.S. Federal Reserve's benchmark interest rate influences borrowing costs across the economy. Since the U.S. government issues Treasury bonds to finance its debt, these securities are also important assets for investors.
The main driver of high U.S. national debt is Washington's failure to control persistent budget deficits. This problem partly reflects political incentives: reducing a deficit usually requires either cutting public spending or raising taxes, or both, and voters often punish governments that take these steps.
Federal debt, measured against the size of the U.S. economy, is now at levels not seen since the Second World War. Without changes to tax and spending laws, it is projected to keep rising indefinitely. Current tax settings may generate nearly enough revenue to cover projected increases in costs, especially retirement and health benefits promised to an ageing population. So far, the U.S. government has still been able to borrow trillions of dollars each year at interest rates that remain moderate by historical standards. However, analysts warn that the country's growing debt burden could eventually trigger a crisis.
Because long-term borrowing costs remain high, the U.S. Treasury is relying more heavily on short-term borrowing, while political pressure on the Federal Reserve to cut interest rates is intensifying. With the United States on track to run deficits close to 6 per cent of GDP even at full employment, the debt-to-GDP ratio is likely to rise each year. That would increase the share of tax revenue needed to service the debt and add further pressure for lower interest rates.
There is growing concern that rising yields on government bonds in the United States and other major economies point to mounting financial stress. As interest payments consume a larger share of public revenue, investors are becoming more wary of U.S. fiscal stability. Major foreign holders of U.S. debt, including Japan and China, have reduced their purchases or sold existing Treasury holdings. Because the U.S. dollar and Treasury bonds remain central to the global financial system, any loss of confidence in U.S. financial stability could spread quickly to foreign banks, pension funds, and local currencies.
U.S. Treasury Secretary Scott Bessent's intervention in government bond markets to contain rising yields has increased concern that the country may be moving closer to a debt crisis. At the same time, long-term real interest rates are rising globally, suggesting that U.S. exceptionalism has weakened. Bessent has argued that long-term rates are too high and has favoured short-term borrowing while waiting for the recent increase in yields to ease.
There is probably a limit to how much debt the U.S. government can issue, but no one knows exactly where that limit lies until markets test it. The country's reserve-currency status gives it more flexibility than most governments because the U.S. dollar remains dominant in international finance. In addition, countries that issue debt in their own currency cannot technically default unless they choose to do so.
The key issue is the government's ability to service its debt-that is, to pay the interest owed. This depends mainly on economic growth and the interest rate on government debt. However, the United States is unlikely to grow its way out of the problem through growth alone. Despite strong nominal growth in recent years, partly boosted by inflation, the country has continued to accumulate debt, adding US$10 trillion since 2022 as public spending remained high.
The current trajectory poses several risks to the U.S. and global economies. First, U.S. Treasury bonds are widely viewed as safe assets, which can draw investment away from other parts of the economy-a process economists call "crowding out". When the United States borrows on a massive scale, less capital may be available for businesses and other countries to borrow.
This pressure is especially strong when yields-the effective interest rates paid by the U.S. government-are high. On August 21, the yield on 30-year U.S. government bonds reached 5.34 per cent, its highest level in two decades. In response, the U.S. Treasury is buying back its own bonds to help stabilise yields. Rising net interest costs, now about 14-15 per cent of total federal spending, are putting increasing strain on the federal budget.
Large fiscal deficits can also be inflationary. They weaken price stability in the U.S. economy and may push the Federal Reserve to raise interest rates. When higher rates flow through to firms and households, they slow economic activity. Compounding the problem, the long-term premium on U.S. Treasuries-a key part of the dollar's "exorbitant privilege" as the global reserve currency-has largely disappeared.
U.S. debt no longer trades at a clear premium as a uniquely safe asset compared with debt from other advanced economies. As a result, the benefits of dollar dominance are diminishing even under favourable conditions. If fiscal pressures ultimately trigger a crisis, the dollar could lose global market share far more quickly than it otherwise would over several decades.
U.S. tariff policy has changed more than 50 times since January 2025, as President Trump imposed tariffs on nearly all U.S. trading partners using a range of tested and untested legal authorities. These include the International Emergency Economic Powers Act (IEEPA), Section 232, Section 122, Section 338, Section 301, and Section 201.
Heavy taxes on imported goods raise consumer prices and invite other countries to retaliate against U.S. exports. Trade disputes disrupt global supply chains and slow business growth. Higher import costs also add to inflation, forcing central banks to keep interest rates elevated for longer.
World trade volume is shrinking for the first time in more than two decades, with a contraction not seen since the global recession that followed the second oil shock of 1979-1980. The United States remains at the centre of this downturn and continues to be a major source of external demand for developing economies in Asia and the Pacific. U.S. import and export data suggest that the impact is especially severe for export-oriented economies in East and Southeast Asia.
U.S. trade with preferential trade partners is contracting faster than trade with the rest of the world, and imports receiving preferential tariff treatment are falling more sharply than imports from non-preferential partners. Developing Asian suppliers without preferential access appear to be performing better in the U.S. market than free-trade-agreement partners. If preferential trade is faltering while trade disputes intensify, the key question is whether the multilateral trading system can respond before protectionism further weakens world trade.
The failure of bilateral free trade agreements to absorb the shock suggests that a new global trade deal may be needed. The outcome is critical because the United States will need stronger net exports to restore growth and unwind its global debt obligations.
On August 25, 2026, Canada imposed tariffs of up to 50 per cent on hundreds of U.S. goods after the United States introduced similar long-threatened tariffs on Canadian products. The move followed the collapse of trade talks that had been moving slowly toward a deal. One of the most significant features of the breakdown was Trump's unprecedented use of an untested provision of the Tariff Act of 1930, better known as the Smoot-Hawley tariff law. Economists generally agree that the Act's escalating retaliatory tariffs prolonged the Great Depression of 1929-1932 by triggering a global trade war. As foreign retaliation intensified and global gross domestic product fell, U.S. trade declined by two-thirds between 1929 and 1932.
Smoot-Hawley includes Section 338, which gives the President authority to impose unilateral tariffs of 50 per cent if a foreign country's policies are found to discriminate against the United States.
Section 338 had never been invoked, largely because the damage from the original Smoot-Hawley tariffs had already been done. That changed in July 2026, when Trump threatened 50 per cent tariffs on Canada over what he described as discriminatory treatment of U.S. products.
U.S. tariffs and rising debt-driven interest rateshave created significant economic pressure for Bangladesh. The tariff environment remains volatile. In July 2026, the Office of the U.S. Trade Representative imposed a new 10 per cent tariff on Bangladeshi goods over forced-labour and raw-material compliance concerns. These measures have placed additional strain on Bangladesh's ready-made garment industry, with combined duty rates reaching 25.62 per cent after recent trade updates.
Trade-war shocks show that shifts in risk premiums-driven by changing risk appetite and economic uncertainty-are a key channel through which trade disputes affect asset markets. These shocks can quickly increase volatility, reduce equity valuations, and heighten uncertainty across global financial markets. Trade tensions often strengthen safe-haven currencies such as the U.S. dollar, while supply bottlenecks can reshape inflation expectations, alter government bond yields, and influence the direction of central bank policy rates.
