Rising US Debt Costs Force Washington to Consider Extreme Measures

The US government is facing rising borrowing costs as long-term Treasury yields hit their highest levels in two decades. With deficits not shrinking and inflation remaining stubbornly high, the Treasury is selling massive amounts of debt. This has led to an annual interest bill of about $1 trillion on over $40 trillion in debt.

Washington has several options to manage these costs, ranging from mild measures like increasing short-term borrowing to more extreme actions such as having the Federal Reserve cap long-term yields. However, these interventions risk stoking inflation, which could lead to more pain for bondholders. Torsten Slok, chief economist at Apollo Global Management, noted that for every five dollars in tax revenue, one dollar is spent on servicing the national debt, a figure that is only expected to rise.

US President Donald Trump suggested that the debt could be addressed through growth or inflation. If these methods fail, the Treasury could turn to strategies like Operation Twist, a 1961 policy involving selling short-term debt and buying long-term bonds. However, such a move would require the Federal Reserve's involvement, which may be reluctant without a clear financial emergency. Jeffrey Gundlach, CEO of DoubleLine Capital, observed that the government is becoming increasingly uncomfortable with current interest rates.

If Operation Twist proves insufficient, the next step could be explicit yield curve control, where the Fed buys unlimited government debt to keep long-term yields below a set ceiling. This approach, last used during World War II, eases political pressure but risks fueling inflation if investors lose confidence. Veronique de Rugy of the Mercatus Center argued that the only lasting solution is cutting spending, as the Fed cannot address the debt problem alone.