US Treasury yields surge past 5%! Bessent faces a major test tonight as the "growth-outpacing-debt" logic comes under market scrutiny.

Title context: US Treasury yields surge past 5%! Bessent faces a major test tonight as the "growth-outpacing-debt" logic comes under market scrutiny. Text: The US 10-year Treasury yield hit 5.04% on Tuesday, the highest since 2007. With Treasury yields continuing to climb and the sustainability of US fiscal policy once again drawing market attention, US Treasury Secretary Bessent will appear before the House Financial Services Committee at 22:00 Beijing time tonight. Markets will focus on whether he sends new signals on fiscal policy, Treasury issuance and buyback plans, debt management, and the outlook for the dollar and interest rates. At the same time, the "grow out of debt" strategy that Bessent has consistently emphasized is facing growing real-world skepticism. Bessent's "growth-out-of-debt" thesis: lofty in theory, stark in reality Bessent said in August: "Global growth is the way to solve this mountain of debt." Last week at an event in Texas, he reiterated: as long as US federal spending remains restrained, plus "3% growth, we can grow our way out of debt." However, the real data does not support this optimistic scenario. Even in 2023 and 2024, US inflation-adjusted economic growth was close to 3%. But in those two years, US debt held by the public climbed by about 10% and 7% respectively, annual deficits both exceeded $1.6 trillion, and debt as a share of economic output also rose. Looking back to the late 1990s, US gross domestic product (GDP) sustained growth above 4%, yet the fiscal position underwent a dramatic turnfrom deficits to surpluses. But that episode was accompanied by tax increases and a post-Cold War slowdown in defense spending. Now, the situation is completely different. After multiple rounds of Republican-led tax cuts, tax rates have fallen sharply. In recent years, lawmakers from both parties have broadly voted to increase rather than cut federal spending. An aging population is pushing up spending on large benefit programs such as Social Security and Medicare. At the same time, amid geopolitical tensions, US President Donald Trump wants Congress to approve $1.5 trillion in defense spending, an increase of as much as 44%. "You can't grow your way out of this problem," said Douglas Holtz-Eakin, president of the right-leaning American Action Forum and a former Congressional Budget Office director. "The math doesn't work." 10-year Treasury yield breaks 5%, Bessent's hearing faces tough questions The recent rapid rise in US Treasury yields has intensified concerns about the long-term sustainability of US debt. Bessent's own benchmarkthe 10-year Treasury yieldhas broken above 5%, a level extremely rare since the early 2000s. On Tuesday morning local time, Bessent may face questioning over his strategy at the House Financial Services Committee hearing. Bessent predicts the AI boom will help accelerate US economic growth, but the mainstream consensus does not believe 3% GDP growth will arrive anytime soon. Media surveys of economists and the latest International Monetary Fund (IMF) forecasts both show US economic growth of only slightly above 2% in 2027 and 2028. Joe Lavorgna, a former adviser to Bessent, said growth is an important part of reducing the deficit and the overall debt burden, and Bessent is right to emphasize it. But he also believes growth alone may not accomplish the task. "Look at the potential for 3% growththat's a pretty good number and would go a long way toward improving the deficit picture," he said. But "you may need more than just growth." Aging intensifies pressure on benefit spending, debt interest costs climb One of the key issues is the steady increase in the number of US retirees, which in turn drives up Social Security and Medicare spendingthe two largest items in the US budget. From Trump's return to the White House through May of this year, US Social Security retirement beneficiaries increased by 2.8 million. But the number of US workers contributing revenue to these benefits rose by only 593,000. Trump has said he will not touch these benefit programs, and Congress has not pushed for major reforms to them. Holtz-Eakin noted that if all goes well and the economy grows rapidly, fiscal revenue will grow at the pace of nominal GDP. Nominal GDP includes inflation. He said 3% real growth plus 2% inflation means 5% nominal growth. But Social Security spending is growing at an average of 5.5%, and Medicare spending by as much as 7.5%. "So you can't solve this problem." The third-largest category of US government spending is interest payments on outstanding debt, and this spending is growing even faster. With one month left in the fiscal year, total net interest has reached $1.02 trillion, up 8.9% from the same period last year. Rising US Treasury yields mean these costs risk accelerating further. US Treasury data show that as of the end of August, the average rate on outstanding US debt was 3.48%, far below current yields. The five-year benchmark rate, closest to the average maturity of currently outstanding US debt, is about 4.77%. At the same time, the US Treasury has recently relied on lower-cost short-term Treasury bills maturing within one year to issue debt. If Federal Reserve Chairman Kevin Warsh and his colleagues raise the overnight policy rate on Wednesday as markets widely expect, the cost of this short-term debt will also rise. "There is no credible estimate showing that growth will be strong enough to make the fiscal situation magically disappear," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget (CRFB). $5,000 checks and deficit targets: the fiscal consolidation puzzle remains unsolved At Tuesday's hearing, Bessent may be asked about a Trump proposal: if Republicans retain control of Congress in the November midterm elections, send a $5,000 check to every US adult. The CRFB estimates the proposal would cost $1.2 trillion for one year alone, while the current annual deficit is about $2 trillion. The group calculates that without offsetting measures, the deficit would reach 9% or 10% of GDP next year. After taking office, Bessent set a goal: reduce the deficit-to-GDP ratio to around 3% before Trump's term ends (January 2029). In 2023 and 2024, that ratio exceeded 6%, and last year it was slightly below that level, partly due to a one-time change in federal student loan accounting. Economists expect the deficit-to-GDP ratio to be 6.4% in 2028. Forecasts range from a low of 4.5% to a high of 8%. Bessent said he is working with White House Budget Director Russ Vought on a fiscal consolidation plan to reduce the deficit. Although he has not yet detailed the plan, he hinted that anti-fraud measures could be part of it. For many budget experts, a credible fiscal plan requires reforming benefit programs. Stanley Druckenmiller, Bessent's mentor during his hedge fund career, signed a call last month for a proposal to gradually reform these programs. Seth Carpenter, chief global economist at Morgan Stanley and a Treasury official during the Obama administration, said "some kind of growth-based fiscal consolidation" is very possible. "But it depends on fiscal policy no longer turning expansionarythat's the really tricky part." Holtz-Eakin estimates that to reach the deficit level Bessent wants through economic growth alone, growth would need to reach 6%. He said that given US population aging and strict immigration restrictions, even 3% growth would be a "miracle."