Borrowing Costs Bite as Deficit Nears $2 Trillion
Long-term US bond yields above 5% and a federal deficit approaching $2 trillion are giving Americans a taste of what a debt crisis would feel like, even though a true emergency remains far off. Higher interest rates, worsened by heavy federal borrowing, are starting to bite in parts of the economy and threaten to deepen the government's debt problem. With the two parties unlikely to agree on fiscal fixes after the November 3 midterms, any solutions appear years away.[S1][S2]
The housing sector is already under pressure. According to Redfin, the typical 30-year fixed mortgage rate stands near 7.5%, while pending home sales fell 4% in September — the sharpest monthly decline in three years. Mortgage rates follow the 10-year Treasury yield, which has risen 123 basis points since the end of February, closing Wednesday at 5.19%.[S1]
A mix of factors is driving the 10-year yield upward. The conflict in Iran, which started on February 28, contributed to the increase in long-term yields, and with oil and diesel prices surging, bond traders are demanding higher yields in case the Federal Reserve lifts interest rates. Investors also seek added compensation for holding longer-dated bonds, anticipating continued heavy issuance of US government debt. Competition for capital is heating up as companies sell hundreds of billions in new debt to fund artificial intelligence infrastructure, and global investors looking for safe long-term debt now have appealing alternatives to Treasuries.[S1]
Deficit Reduction Faces Political and Economic Hurdles
If the US government could make a credible commitment to reducing the deficit, long-term bond yields would probably decline, though the precise impact would hinge on the scale of the cuts and other variables like a slowing economy or cheaper oil. Treasury Secretary Scott Bessent has said the US should aim for a deficit under 4% of gross domestic product by the close of President Donald Trump's term. That goal is almost certainly unattainable. The Treasury Department will soon publish official figures for fiscal year 2026, which ended in September, but the result is already apparent: the deficit will land near $2 trillion, possibly higher, likely around 6.0-6.2% of GDP, based on the Congressional Budget Office's $1.993 trillion estimate and projected third-quarter GDP.[S1]
Elevated rates make shrinking the debt more difficult. The CBO estimates that if interest rates remain half a percentage point above its projections, the cumulative deficit over a decade would be $1.9 trillion larger. Should rates exceed expectations by 1.5 points, deficits would grow by $6 trillion. The CBO projects the 10-year Treasury to average 4.3% over that span, versus 5.3% currently. Those worrying outcomes would demand that rates throughout the economy stay high for years.[S1]
Speaking in Dallas, Bessent said the nation is burdened by a mountain of debt and must grow its way out, and he and others have pointed to artificial intelligence as a key future growth engine. AI may help, but it cannot fully resolve the issue. The Committee for a Responsible Federal Budget, which advocates balanced budgets, calculates that balancing the budget through growth alone would require a decade of 7.2% growth. Second-quarter GDP growth was recently revised up from 1.5% to 2.2% at an annualized rate, and the acceleration needed to hit 7.2% would mean an almost inconceivable economic shift.[S1]
Divided Government Clouds the Path Forward
Trump is about to enter the last two years of his presidency, a stretch when presidents frequently take on ambitious, legacy-defining initiatives, yet he gives little indication of making deficit reduction one of them. He promised $5,000 checks to every adult American if Republicans swept the election. In reality, Republicans are widely expected to lose at least the House and perhaps the Senate. Divided government can occasionally yield unexpected compromises, but the two sides start far apart. Rep. Hakeem Jeffries, likely the Democrats' next House speaker, wants to undo the $1 trillion in healthcare cuts Congress passed last year as part of Trump's signature legislative package. And that ignores the deep hostility between the parties.[S1]
Total US debt reached $40 trillion this year, yet nobody truly knows what level becomes unsustainable. A genuine debt crisis probably lies much further off. It would resemble what Americans face now, only far worse, with debt yields soaring as global investors dumped dollar assets and little the Treasury or the Fed could do. For the moment, higher yields are drawing investors into US government bonds, a reminder that costly borrowing is not the same as a crisis. But the key point is that economics alone cannot solve this. If Americans want to prevent a full-blown debt crisis, they must also find a way to fix the politics.[S1]
