US Debt Growth Outpaces Interest Costs Amid Rising Yields
The U.S. debt situation is drawing attention as 10-year Treasury yields surpass 5%, driving interest costs above $1 trillion. Despite this, economic growth at an annualized rate of 8.5% in the second quarter, before adjusting for inflation, continues to outpace the 3.4% average interest rate on the national debt. The Bureau of Economic Analysis reported this growth figure, while TD Securities notes that higher interest costs will gradually become more pronounced as older bonds mature.
Yields on 10-year Treasuries recently hit a 24-year high, yet the U.S. does not refinance all its debt at once. TD Securities estimates the weighted-average maturity of the debt at about 5.9 years. Bonds, excluding short-term bills, carry an average coupon rate of 3.1%. TD projects that fiscal 2026 interest costs will reach approximately $1.1 trillion, rising to $1.4 trillion in 2027 and $1.6 trillion by 2029 if yields remain stable. The Congressional Budget Office anticipates public debt will hit about 101% of GDP by fiscal 2026.
Strategists at TD Securities, Gennadiy Goldberg and Molly Brooks, suggest that a fiscal crisis is not imminent. They attribute the surge in yields to a robust economy, anticipated Federal Reserve rate hikes, and higher oil prices. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, also points to stronger growth as a contributing factor. Matthew Reese of L&G Asset Management warns that the situation could worsen if nominal growth slows, though he notes that Japan has managed similar challenges despite weaker growth.
A BMO survey highlights housing as the most likely victim of higher inflation-adjusted rates, with 42% of respondents identifying it as the first casualty, compared to 26% for stocks and just 1% for the labor market. Meanwhile, Hong Kong’s Hang Seng Index dropped as much as 3% on Friday due to its currency peg’s exposure to U.S. yields. The stability of the current situation hinges on sustained economic growth, according to Lyngen, who notes that a lasting brake on yields would require clear evidence of economic or risk asset deterioration.