Strategists at BofA Global Research are sounding the alarm on America's rising debt costs, warning that the nation could face a debt spiral as early as 2028. The federal deficit closed fiscal year 2026 at US$1.99 trillion, or 6.2% of GDP, which is higher than the White House's target of 3%. However, the real concern lies in the interest on the debt, which has more than doubled since 2021 to over US$1.2 trillion annually.
The strategists, led by Meghan Swiber, note that rising yields could add roughly $4 trillion to interest costs over the next decade. Every 100 basis points the Federal Reserve hikes adds another US$95 billion a year. This growing interest burden is increasing the government's financing needs, even if primary deficits remain unchanged.
A classic trigger of a debt spiral occurs when interest rates on debt exceed an economy's nominal growth. The BofA team warns that this could happen as early as 2028, making the fiscal backdrop worse than the Congressional Budget Office's February projections. While nominal growth is currently above 4%, supported by inflation and AI investment, these forces may be temporary.
The strategists also highlight that the global savings glut appears to be diminishing, which could lead investors to demand higher compensation for holding Treasury securities. This, combined with rising debt-to-GDP, suggests that fiscal deficits could become a more important driver of higher-for-longer interest rates. The bottom line is that higher interest rates are turning the U.S. deficit into a bigger financing problem, with compounding interest expenses and rising financing needs making the fiscal trajectory less sustainable.