Bank of America analysts have highlighted a growing concern among clients about the risks posed by the U.S. fiscal deficit, particularly as elevated interest rates persist. The bank’s team, including Meghan Swiber and Ralph Axel, noted that higher rates significantly increase the cost of servicing the national debt, which has now surpassed $40 trillion. Treasury payments for debt servicing hit $2 trillion for the 2026 fiscal year, underscoring the urgency of the issue.
A recent analysis by the Congressional Budget Office (CBO) examined two scenarios: one where interest rates are 1.5% higher than current projections and another where they are just 0.5% higher. The first scenario would result in $6 trillion larger deficits and a $4.9 trillion increase in net interest costs, while the second would add $1.9 trillion to current debt projections and $1.6 trillion in net interest costs. Bank of America estimates that every 100 basis points of Fed rate hikes adds $95 billion annually to interest expenses.
The concern extends beyond Bank of America. Mark Zandi, chief economist at Moody’s, observed that global investors are demanding higher rates to compensate for mounting risks associated with U.S. spending habits. He noted that the 10-year Treasury yield has risen by about a percentage point this year, one of the largest increases among major economies. Zandi warned of a potential vicious cycle where higher rates lead to increased interest payments and debt, which in turn pushes rates even higher.
Bank of America’s analysts agreed, stating that the unchanged deficit picture is becoming a ‘bigger financing problem.’ They emphasized that elevated yields feed through to the debt stock, compounding interest expenses and raising financing needs, ultimately making the fiscal trajectory less sustainable.