U.S. government borrowing costs have risen to their highest levels in decades, stoking concerns that the country's growing debt burden could eventually trigger a fiscal crisis. Will it?
The benchmark 10-year Treasury yield is now firmly above 5%, while the government's net interest costs estimated at about $1.05 trillion in the first 11 months of fiscal year 2026.
Experts are voicing concerns over the vicious cycle of rising debt and higher yields. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, a U.S. policy think tank, has warned that higher borrowing costs risk becoming self-reinforcing as mounting interest expenses force the government to borrow still more.
"The real threat is the debt spiral. If interest begets debt, and debt begets interest, eventually debt will spin out of control. A fiscal crisis, once unthinkable, is now a distinct possibility," MacGuineas said in a statement last month after the 10-year Treasury yield crossed 5%.
The nightmare scenario is relatively straightforward: investors demand higher yields to lend to a heavily indebted government; those higher rates push up Washington's interest bill; the government has to borrow more to service its debt obligations; and investors demand even higher yields in response.
Some bond market experts, however, say the U.S. is some distance from a fiscal breaking point, and that the latest surge in yields may have as much to do with a surprisingly resilient economy as fears over government debt.
"A fiscal apocalypse is not upon us just yet," TD Securities strategists Gennadiy Goldberg and Molly Brooks said in a recent note.
The bank estimates U.S. interest expenses in fiscal year 2026 to be around $1.1 trillion and continue rising if rates remain elevated. Its projections show financing costs reaching $1.4 trillion in fiscal 2027, $1.5 trillion in 2028 and $1.6 trillion in 2029, if yields stay around current levels.
An important buffer is that Washington does not have to refinance its entire debt pile at today's higher rates immediately, the investment bank's analysts said.
The weighted-average maturity of U.S. government debt is about 5.9 years, meaning higher borrowing costs feed through gradually as existing bonds mature and new debt is issued. The average coupon on Treasury securities excluding bills is still just 3.1%, according to TD Securities.
Perhaps more importantly, the average interest rate on U.S. debt, at about 3.4%, remains below the rate at which the economy is growing in nominal terms. Nominal U.S. GDP grew at an annualized rate of 8.5% in the second quarter, according to the latest Bureau of Economic Analysis estimate. That helps keep the debt burden manageable even as deficits remain large, TD said.
Matthew Reese, head of global bond strategies at L&G Asset Management, also said fears of an imminent U.S. fiscal crisis were "exaggerated."
"There are valid concerns that the U.S., along with many other developed economies, will suffer from the negative feedback loop caused by higher yield costs increasing their fiscal burden as they refinance their debt and fund their fiscal deficit," he told CNBC in an e-mail.
"However, the US still retains much of the 'exorbitant privilege' of the US dollar and its role as the most liquid and still highly rated economy. Therefore, we are some way away from a fiscal crisis."
The negative feedback loop becomes more dangerous when nominal economic growth falls to low levels, causing debt relative to the size of the economy to rise persistently, Reese said.
Still, high debt alone does not necessarily trigger a crisis.
"It is important to note that countries such as Japan have coped with significantly higher debt levels than the U.S., with very low nominal growth, without suffering a fiscal crisis," Reese said.
Federal debt held by the public is projected to stand at about 101% of GDP in fiscal 2026, according to the Congressional Budget Office.
While that trajectory is enough to keep investors concerned, TD Securities does not see a fiscal crisis as imminent.
And government finances may not even be the main reason Treasury yields have risen so sharply.
TD pointed to stronger economic growth, expectations for Federal Reserve rate hikes, higher oil prices, corporate bond issuance and repositioning by fast-money investors alongside fiscal concerns, as factors driving yields higher.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, also pointed to the resilience of the U.S. economy as an important driver of higher Treasury yields.
"All else being equal, investors are content with the underlying performance of the real economy and share the Fed's inflation angst," Lyngen wrote. He said the latest jobs data was likely to "confirm the resilience of labor market conditions in the face of sticky inflation and elevated borrowing costs
Lyngen added that the rise in longer-term yields has "largely been a real rates story," with investors pointing to stronger actual and expected economic growth, among other factors, to explain the move.
In BMO's survey, just 1% of respondents said the labor market would be the first area to show clear signs of stress from rising real rates. Housing topped the list at 42%, followed by stocks at 26% and corporate credit at 21%.
The picture could change, however, if higher rates finally begin to inflict significant damage on the economy or financial markets. Lyngen said the "only durable constraint on even higher bond yields would be indisputable evidence that either the economy or risk assets are buckling under the pressure of elevated borrowing costs."
