America’s Fiscal Reckoning: When Debt Management Becomes Unsustainable By Qaiser Nawab, Chairman BRISD

The United States Treasury recently announced an expansion of its bond buyback operations, hoping to stabilize turbulent markets in longer-dated Treasury securities. The announcement was modest in technical terms—doubling the maximum size of individual operations from $2 billion to $4 billion. Yet it carries profound implications for global markets and, particularly, for countries like Pakistan that depend on the stability of dollar-denominated assets and credit systems. What the Treasury’s move really signals is not market confidence but market anxiety about the sustainability of American fiscal policy.The problem is straightforward, if discomforting: the United States is caught in a deteriorating fiscal cycle that technical interventions cannot solve. The federal government is borrowing record amounts while the costs of that borrowing continue to rise. In July alone, the monthly budget deficit reached $432.3 billion—48 percent higher than July 2025 and the largest monthly deficit since March 2021. For the first ten months of fiscal year 2026, the deficit has already reached $1.8 trillion, with Congressional Budget Office projections suggesting the full-year deficit will touch $2.1 trillion. Meanwhile, net interest payments on federal debt have already consumed $963 billion. This is not a temporary challenge. It is a structural crisis that Washington appears unable or unwilling to address.The Treasury’s bond buyback strategy attempts to address symptoms rather than causes. The department raises funds by issuing short-term Treasury bills and uses the proceeds to buy back longer-term bonds in the secondary market. The goal is to reduce the supply of long-dated Treasuries, lower long-term borrowing costs, and ease pressure on the yield curve. It sounds plausible in theory. In practice, the Treasury announced operations totaling perhaps $160 billion through November—less than 4 percent of the annual deficit, and a trivial fraction of the $40 trillion in outstanding U.S. Treasury debt. The market’s response was telling: the 30-year Treasury yield fell ten basis points after the announcement but rebounded completely the following day. Technical interventions cannot sustain confidence when the underlying fundamentals are broken.The Structural Problem Congress Cannot SolveWashington’s political dysfunction is central to understanding why fiscal deficits persist and worsen. After each debt-ceiling crisis, policymakers issue reassurances that deficit reduction will follow. Those commitments have repeatedly proven empty. Republicans and Democrats remain divided over spending on healthcare and defense, as well as over tax policy. These divisions are not incidental; they reflect genuine disagreements about the role of government and the distribution of fiscal adjustment burden. Yet they have resulted in Congress producing no credible plan to reduce deficits—only incrementally raising debt ceilings while deficits continue climbing.This political paralysis has real consequences. The elevated yields at the long end of the Treasury curve are not simply a liquidity premium reflecting temporary market disruption. They incorporate an increasingly visible risk premium for uncertainty surrounding American fiscal sustainability. Global investors—who hold nearly $8 trillion in U.S. Treasury debt—are reassessing their assumptions. For decades, holding Treasury bonds was considered the safest possible investment. That assumption is beginning to fracture.The immediate concern is not default. The United States maintains the ability to service its debt and will not default on existing obligations in the foreseeable future. The problem is slower and more insidious. As deficits mount and debt accumulates, the cost of refinancing existing obligations rises. Higher interest rates make the deficit worse by increasing borrowing costs, creating a vicious cycle. Higher rates also constrain the private economy by making business investment and consumer borrowing more expensive. The Treasury’s interventions attempt to interrupt this cycle by keeping long-term rates artificially low. But as markets have demonstrated, such interventions cannot hold indefinitely against the weight of fiscal fundamentals.Global Implications and Emerging Market ConsequencesFor countries positioned outside the American economy, persistent U.S. fiscal deficits carry direct costs. Higher American interest rates—driven by government borrowing needs—pull capital away from emerging markets toward safe-haven U.S. Treasuries. This applies downward pressure on emerging-market currencies and upward pressure on local borrowing costs. Pakistan, which depends on dollar-denominated external financing and operates within a global financial system denominated in dollars, faces particular sensitivity to shifts in U.S. credit conditions. When American fiscal stress drives up Treasury yields, the cost of Pakistan’s own dollar borrowing rises commensurately.The concern extends beyond simple interest rate transmission. Confidence in the U.S. fiscal framework undergirds the entire architecture of dollar-based global settlement systems. If that confidence erodes gradually but persistently, the consequences could be severe. Countries might demand higher risk premiums for holding dollars. Alternative settlement systems might accelerate development. Central banks might diversify away from dollar reserves more rapidly. These are not imminent threats, but they are consequences worth contemplating for a nation whose external financing depends fundamentally on the stability of dollar-based credit markets.The writer is the Chairman of the Belt and Road Initiative for Sustainable Development (BRISD).