The US Government’s fiscal position has slowly but consistently weakened over an extended period. If left unaddressed this could at some point lead to some disruption in global financial markets. This note examines trends in and the outlook for US public finances as well as what the potential impact of these might be on US Treasury bond yields.

This note, the fifth in a series on the drivers of bond yields, provides a topical example of a factor – US fiscal trends – which could impact the risk (or ‘term’) premium, a key sub-component of bond yields. It builds on earlier notes in this series. The first outlined the different sub-components of yields including expectations and risk premiums for short‑term real interest rates and inflation. The second presented estimates and a discussion of trends in these while the third note identified drivers of the sub-components. The fourth note presented a deep dive into a factor (equilibrium interest rates) which could impact the other component of bond yields, expected short-term interest rates. The next note, the final in the series, will present long‑term projections for US and Australian Government bond yields.

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