Long-term interest rates have been climbing, and the increase is doing more than raising mortgage costs for American families. It is also exposing how fragile the federal government’s finances have become.
The yield on the 10-year Treasury note has recently reached 5 percent, a level that already exceeds the average rate the Congressional Budget Office projected for the entire coming decade. In its most recent Budget and Economic Outlook, released in February, CBO assumed 10-year interest rates would average 4.1 percent in Fiscal Year 2026, 4.2 percent in 2027, 4.3 percent from 2028 through 2031, and 4.4 percent from 2032 through 2036.
That gap matters. If rates stay above what CBO projected, the extra cost of servicing the national debt could add trillions of dollars to already grim long-term budget forecasts. The Committee for a Responsible Federal Budget estimates that if interest rates remain at current elevated levels, the federal government will within a decade spend more on interest payments than on either Medicare or Social Security retirement benefits.
The rise in rates has several causes. Persistent inflation is one. Another is the surge in spending on data centers and artificial intelligence infrastructure, which has drawn so much capital that it has pushed up the cost of borrowing across the economy. But part of the increase also reflects growing doubt in financial markets about whether the federal government can manage its rapidly rising debt load.
A Longer-Term Warning
Beyond the immediate budget math, economists point to a deeper danger: what happens when interest rates on government debt exceed the rate of economic growth. In that situation, a country cannot simply grow its way out of a debt problem — the debt grows faster than the economy that has to support it. Analysts at the Committee for a Responsible Federal Budget describe this dynamic as increasing the odds of a full-blown fiscal crisis, and note that continued borrowing combined with higher rates brings that possibility closer.
The concern is not limited to one side of the political spectrum. Jared Bernstein, who chaired the Council of Economic Advisers under President Biden, recently wrote in the New York Times that he has “never been a budget hawk” but is now alarmed by the country’s trajectory. He wrote that “our annual deficits, currently about 6 percent of GDP, are way above where history says they should be. We’re not in a recession, but we’re borrowing as though we were,” and added that “politically, neither party shows any interest in addressing the problem.”
“Our annual deficits, currently about 6 percent of GDP, are way above where history says they should be. We’re not in a recession, but we’re borrowing as though we were.” — Jared Bernstein
Bernstein’s own record is not spotless on this front — the administration he served helped drive up deficits, and a bill he supported, had it passed in full, would have added even more debt. But that history does not change the substance of his warning about the current fiscal path.
What Comes Next
Whether Washington acts on its own, or only after a crisis forces its hand, remains an open question. Neither political party has shown much appetite for the kind of spending or tax decisions that would bring deficits down, and voters themselves have shown little enthusiasm for the trade-offs that would require.
Some observers argue that if a reckoning is inevitable, it may be better for it to arrive sooner, while the national debt stands near $40 trillion, than later at an even higher level. Either way, the pressure building in the bond market suggests that the current path cannot continue indefinitely — and at some point, it will stop.
