The interest burden on U.S. government debt reached a record high in fiscal 2026, consuming an increasingly larger portion of federal revenue and raising the risk of a surge in debt that could leave the country more vulnerable to economic shocks.
In the 12 months ending in September, net interest costs totaled US$1.05 trillion (R$5.33 trillion), an increase of more than 8% compared to the US$970 billion in fiscal year 2025, according to data released by the Treasury Department this Friday (16).
The Peter G. Peterson Foundation research group estimates that these costs reached 3.2% of GDP (Gross Domestic Product), surpassing the previous record, recorded in 1991. GDP data for the last quarter will be released later this month.
The increase reflects both the much larger volume of debt on which interest must be paid — one of the main measures exceeds US$32 trillion (R$162.34 trillion), around US$10 trillion more than just five years ago — and the much higher interest rates.
The average rate paid by the government on marketable Treasury bonds was 3.52% at the end of September, more than double the 1.47% five years earlier.
To make matters worse, current yields are even higher: Bloomberg's US Treasury bond index gauge is now around 5%.
The rise in rates prompted US Treasury Secretary Scott Bessent to take extraordinary measures to contain the movement, although economists argue that the country is still far from a crisis. Demand at bond auctions has been solid, and higher financing costs are not restricting the flow of credit.
"It doesn't look like a crisis — it's more of a slow erosion (of fiscal capacity)," commented Louise Sheiner, senior fellow at the Brookings Institution and former Fed economist. What is not known is at what point "some creditors will decide not to lend to us — and, if that happens, it could trigger a fiscal crisis", with the Treasury losing access to the markets to raise funds, he added.
Gennadiy Goldberg, head of US interest rate strategy at TD Securities, stated that one of the factors that, for now, avoids deeper concerns is the fact that the country's nominal GDP growth rate — fundamental for items such as corporate revenues and tax revenue — is higher than the yields on US Treasury bonds.
Nominal GDP growth in the second quarter was 6.3% compared to the same period last year. “A fiscal apocalypse is not upon us yet,” analyzed Goldberg.
UNDER CONTROL, FOR NOW
"Somehow, we are managing the situation, even with the rising interest rates," said Congressional Budget Office Director Phillip Swagel on October 8 in Minneapolis. At the same time, he warned that the deterioration of fiscal dynamics leaves the country increasingly vulnerable.
"Whenever there is a negative shock and interest rates rise, whatever the reason, a 'turbo effect' can occur," he highlighted.
In this scenario, the shock caused by higher interest rates "feeds the deficit, which feeds the debt, which puts pressure on interest rates and the economy again", summarized Swagel. In February, the body he heads projected that the debt/GDP ratio will reach a record of more than 106% in 2030.
The former Treasury official also stated that, although he has been conveying the same message about the fiscal situation for a long time, in the last two years market participants have started to show more interest.
Interest costs are now among the top three items of federal spending, after more than doubling since 2022. They are behind only Social Security and Medicare, the federal programs aimed at older Americans, whose costs rise every year as the number of beneficiaries grows by the millions. The Department of Defense and Medicaid round out the top five.
The last time interest costs, as a share of debt, were close to current levels, the country's policy mobilized to meet the challenge.
The then president, George H.W. Bush, became known for breaking his promise not to create new taxes by sanctioning, in 1990, a package of increases, shortly before the proportion of interest costs reached its peak. His successor, Bill Clinton, raised taxes even further in 1993.
WAIT FOR THE CATASTROPHE?
The end of the Cold War was also accompanied by a drop in defense spending, which strengthened the fiscal framework. At the end of the 1990s, the acceleration of economic growth, amid the spread of the internet and personal computing, boosted revenues.
Today, Bessent and other Trump administration officials have been promoting the artificial intelligence boom as a growth stimulus that will help reduce the debt-to-GDP ratio. Budget experts, however, are skeptical.
According to them, spending on defense and social benefit programs is likely to continue rising, while GDP growth is unlikely to be fast enough to sufficiently raise revenues.
"The problem is only getting worse, so we shouldn't be arguing about whether to wait for catastrophe — we should be working on it now," commented Brett Loper, executive vice president of public policy at the Peterson Foundation. "It will be very difficult to get out of this problem."
This year's increase in net interest payments, of US$81.4 billion (R$412.94 billion), may seem small if rates continue to rise. The Fed is expected to raise its short-term base rate at least once more — currently between 3.75% and 4% —, which would increase the cost of short-term debt, increasingly favored by Bessent.
An increase of 1 percentage point across the entire yield curve would increase interest costs in 2027 by US$310 billion (R$1.57 trillion), according to calculations by TD Securities.
"I don't think a fiscal crisis is imminent; we still have a pretty strong economy," said Karen Dynan, a Harvard University economics professor who worked at Treasury during the Obama administration. She further noted that rates have not returned to the levels of three or four decades ago.
"[At the same time], with debt so high, net interest payments really matter — they will lead to a snowball effect on debt. Rising interest rates and interest payments in relation to GDP could generate popular pressure for measures," he assessed.
