US Government's Borrowing Binge Sparks Interest Rate Surge

The US government's borrowing binge is finally starting to take its toll on interest rates. The yield on the benchmark 10-year U.S. Treasury note rose to 4.97% on Friday, up a full percentage point since the end of February and just shy of its high since 2007. The rate on a 30-year fixed-rate mortgage has risen in lockstep, reaching 7.08%, the highest in over a year.

The immediate catalyst for this was an inflation report that showed consumer prices surging higher in August, with gasoline prices accounting for more than a third of the gain. Gasoline is now at a national average of $4.29 a gallon, while diesel has climbed to over $6 a gallon.

This means the Federal Reserve is expected to raise its target interest rate this week. But longer-term borrowing rates are set in global markets and determined by bigger forces. The US government is spending about $2 trillion more than it raises in taxes at a time when the cumulative debt is already roughly 100% of GDP.

Despite interventions by Treasury Secretary Scott Bessent to smooth turbulent bond markets, these efforts haven't succeeded in making borrowing cheaper. Instead of focusing on deficit reduction, President Trump has floated the idea of $5,000 payments to all US adult citizens if Republicans win midterm elections.