US debt hits $40 trillion: Why are soaring Treasury yields making it worse?

The US debt has surpassed $40 trillion, coinciding with a surge in Treasury yields, exacerbating concerns about the nation's fiscal outlook. Elevated yields imply the government must pay increased interest on borrowed funds, intensifying strain on the federal budget. The 10-year Treasury yield surged to 5.23% on Friday, the highest level since 2007, marking a 1 percentage point rise from pre-Iran war levels.

The 30-year yield also climbed to 5.49%, a peak not seen since 2004. These longer-term yields impact borrowing costs across the US economy, influencing mortgages and other loans. Multiple factors contribute to rising yields while US debt continues to expand. Oil prices have increased due to the Middle East conflict, AI hyperscalers are investing billions annually, the US economy remains robust, and total debt has reached $40 trillion.

Treasury yields now exceed long-term expectations set by the Congressional Budget Office (CBO). The CBO forecasted a 4.1% average 10-year yield for 2026, 4.2% for 2027, 4.3% from 2028 to 2031, and 4.4% from 2032 to 2036. The current 10-year yield of 5.23% far surpasses the CBO's projections for the current and upcoming years. This matters because higher yields escalate the cost for the US government to finance its substantial debt.

Treasury yields determine how much the government pays to borrow money; higher yields elevate interest expenses when issuing new debt and refinancing existing debt. US interest payments already amount to about $1 trillion annually. Meanwhile, the federal budget deficit is projected to reach $2 trillion this year, according to Fortune.

Political consensus to reduce the deficit appears elusive, potentially making the already substantial deficit harder to manage. Rising Treasury yields prompted Senator Jeff Merkley, the Democratic chair of the Senate Budget Committee, to request updated CBO calculations. Merkley asked the agency to analyze potential outcomes if interest rates exceed expectations.

The CBO examined a scenario with a 1 percentage point rise in interest rates above the baseline forecast. In this scenario, the primary deficit (excluding net interest payments) would be 0.4 percentage points higher by 2056 compared to the baseline. The overall deficit would be significantly higher due to increased interest costs, estimated at 4.9 percentage points larger by 2056.

This demonstrates how substantial interest costs can exacerbate the debt problem. Even if the underlying deficit excluding interest does not rise dramatically, servicing the debt can push the overall deficit much higher. With higher interest rates, the total US deficit could reach 14% of GDP by 2056, compared to 5.8% this fiscal year and an average of 3.8% between 1976 and 2025.

Publicly held US debt would reach 222% of GDP in the higher-rate scenario, more than double today's level. The debt-to-GDP ratio would increase by 47 percentage points, putting additional upward pressure on Treasury interest rates. This creates a potential debt-and-interest cycle. Higher yields raise interest costs, adding to the deficit and requiring more borrowing, which in turn can push Treasury yields even higher.

Slower economic growth could result from higher debt costs, making it harder for the US to grow its way out of the debt problem.