Why it matters: An upward shift in long-term interest rates is putting the government on track to spend much more on interest payments in the coming years than was anticipated just a few months ago.
- If current rates stay high and fiscal policy matches current forecasts, the cost of servicing those debts will surpass defense spending in 2025 and top Medicare spending in 2026.
- In the current fiscal year, interest spending is on track to surpass $800 billion, more than double 2021’s $352 billion figure. In 2026, the government’s net interest expense would reach 3.3% of GDP, the highest on record.
By the numbers: In July, the CBO fiscal projections assumed that the 10-year U.S. treasury bond would yield 3.8%, which was about where the securities were trading at the time.
- Not anymore. Since then, the 10-year yield set new modern highs, surpassing 4.8% on Oct. 6 (it was 4.71% on Monday morning).
How it works: Higher rates increase the burden of old debt — but not all at once. As the longer-term Treasury securities that were issued during the low-rate era (roughly 2008 to 2021) gradually mature, rolling over that debt will be more expensive.
Yes, but: Markets can shift abruptly, as the last few months show, so it’s possible rates could return to something closer to their pre-pandemic norms in the years ahead, easing the pressure.