For years—decades even—the spiraling trajectory of U.S. debt fueled dire warnings, which investors consistently brushed off as low borrowing costs helped turbocharge epic stock gains.

Meanwhile, the debt pile galloped higher, interest costs sucked up a bigger share of the federal budget, and deficits continued to expand. Rating agencies downgraded U.S. credit, and foreign central banks stopped buying as many Treasuries.

The precise tipping point was always unclear, especially as the U.S. dollar retained its status as the world’s top reserve currency. But the global bond selloff this past week that sent yields to the highest level in two decades showed debt is finally front and center as a concern.

“When does debt become unsustainable? When the global financial markets say it is,” RSM Chief Economist Joseph Brusuelas said in a note on Wednesday. “That appears to be happening.”

Debt worries weren’t limited to the U.S., with yields in other top economies like the U.K., France, Germany, and Japan also surging.

That’s as governments since the COVID pandemic have continued spending as if borrowing costs were still at crisis-era lows and letting deficits worsen as if their economies were still in desperate need of emergency stimulus.

But the economic landscape is totally different now. Interest rates have surged in recent years to combat high inflation, and the AI boom is pouring hundreds of billions of dollars a year into an economy that increasingly immune to higher rates.

In addition, the so-called hyperscalers are relying more on debt to finance their capital expenditures, competing with the Treasury Department for bond market dollars.

“Given that public debt is already so high for many countries, it’s only been a matter of time until markets run out of patience,” Robin Brooks, a senior fellow at the Brookings Institution, wrote in a Substack post on Tuesday. “It looks like that’s happening now.”

Yields went up so quickly that the Treasury Department suddenly announced it will increase buybacks of long-dated bonds. The move briefly lowered yields, but they went back up again as investors doubted such financial engineering can hold back the tide.

How did we get here?

In addition to deficits, other factors converged to finally set off alarm bells in the market. The more proximate cause was the return of higher oil prices amid the ongoing stalemate between the U.S. and Iran.

With no signs of any diplomatic progress, investors expect energy costs will keep inflation higher for longer, likely forcing central banks to hike rates.

But Federal Reserve Chairman Kevin Warsh has refused to offer forward guidance on how policymakers will respond to future inflation, creating uncertainty that put even more upward pressure on bond yields.

Brusuelas also pointed to an “elephant in the room,” namely economic populism from both sides of the aisle. From the left it takes the form of more spending. And from the right, it’s typically tax cuts.

Both versions also tolerate higher inflation and resist efforts by central banks to rein it in, he added.

“If such policies go on long enough without a course correction, banking and currency crises tend to follow,” Brusuelas warned. “Global investors understand the end game of such policies.”

Similarly, analysts at Capital Economics said in a note Tuesday that bond investors are demanding greater compensation for fiscal, geopolitical and policy uncertainty, describing it as a shift that will prove persistent. 

While the pace of the bond selloff isn’t justified by recent events, the market’s concerns are rational as governments show little indication of curbing deficits, they added.

That means a higher term premium, or the extra return that investors demand for holding an asset over the long term, is “fundamentally warranted.”

“As a result, we expect term premia to remain elevated and bond markets to remain susceptible to renewed bouts of volatility in the quarters ahead,” Capital Economics predicted.