More Defense: U.S. Bond Interest Rates hit Record
The expenses of the US federal budget for the payment of interest on the national debt for one month amounted to $185.2 billion, exceeding the figure of the same month last year by 28%. On an annual basis, the amount reached $1.35 trillion, which is equivalent to 4.3% of national GDP. Over the past five years, the volume of payments on the US national debt has tripled. Now they exceed defense spending by a quarter, although 15 years ago they were three times less. Izvestia investigated what caused this growth, whether it was possible to somehow cope with the increase in the debt burden and when the situation would reach the point of no return.
Debt is not as terrible as interest
The history of servicing American debt highlights the essence of the current problem well. In the 1980s, when Federal Reserve Chairman Paul Volcker was fighting double-digit inflation, borrowing costs were extremely high. However, the ratio of public debt to US GDP at that time was about 30-35%, which allowed the budget to cope with the interest burden.
In recent decades, the situation has become different. After the mortgage crisis, debt began to grow rapidly, but the Fed kept interest rates at zero and implemented quantitative easing programs. As a result, the nominal debt doubled, but the cost of servicing it in dollar terms remained virtually unchanged. Investors are used to the fact that the amount of debt does not matter as long as the cost of servicing it remains manageable.
In the 2020s, this mechanism began to work in the opposite direction. The average government debt rate has exceeded 3.4% per annum for the first time since 2009. This indicator has significant inertia: the Treasury regularly extinguishes old bond issues placed at 1-2%, and is forced to borrow new funds at current market interest rates. Given that the yield on the entire government debt curve is in the range of 3.7–5.1%, and ten-year securities are trading above 4.6%, the weighted average rate will continue its inevitable growth. That is, if the current situation persists, interest expenses will exceed 5.5% of GDP in the coming years, becoming the largest item in the federal budget.
The volume of debt itself also shows a steady trend towards expansion. In June alone, the figure increased by $0.25 trillion, reaching $39.46 trillion. Over the past year, the increase amounted to $3.3 trillion, and over two years — $ 4.6 trillion. The average rate of accumulation of liabilities has fixed at $2.3 trillion per year.
Geopolitics and inflation
The situation is aggravated by the external background and internal political decisions. The military conflict over Iran, despite the established pause, has already had a fundamental impact on the cost of energy resources. Expensive oil (and oil supplies from the Persian Gulf are not limited to oil) and logistical problems have triggered a new round of industrial inflation. At the same time, the administration of Donald Trump is pursuing a policy that encourages price increases through protectionist tariffs, and is forming a request to increase the military budget to $1.5 trillion for next year.
Inflationary pressures have interfered with the calculations of the US Treasury to reduce the cost of borrowing. The published minutes of the last Fed meeting indicate that the regulator is considering the possibility of returning to tightening monetary policy. Almost all participants in the open market committee noted the need for further steps to curb prices. The futures market reacts harshly: the probability of an increase in the base rate in September is estimated at 84%, and in October at 92.5%. This means that 30-year bond yields exceeding 5% may become the long-term norm.
The dedollarization factor
The US financial authorities are faced with a difficult choice, where both available options lead to negative consequences.
The first option involves maintaining high rates to suppress inflation. In this case, the government will continue to borrow money at 5% per annum. With a permanent budget deficit, the Treasury will have to issue new bonds simply in order to pay interest on the old ones. A debt spiral is emerging, pulling liquidity out of the real economy.
The second option is to force the Fed to lower rates and resume buying government bonds (debt monetization). This scenario will reduce the burden on the budget, but will inevitably lead to a new inflationary spiral. An attempt to devalue debt through inflation will hit the savings of the population and the corporate sector. The pension system won't thank you for that.
The complexity of the situation is compounded by the slow but consistent process of de-dollarization of global trade. The largest foreign holders of U.S. debt, including central banks in Asia and the Middle East, are reducing the share of U.S. Treasury securities in their reserves, opting for gold or a basket of alternative currencies, in some cases even cryptocurrencies. Declining demand from external creditors is forcing the U.S. Treasury to rely on domestic investors, who need a higher risk premium to buy record amounts of debt.
The Mathematics of Sustainability: The Findings of the Penn Wharton Budget Model
The question of when the current dynamics will become critically dangerous for the American economy is examined in detail in a study by the Penn Wharton Budget Model (PWBM) at the University of Pennsylvania. Analysts model the horizon of federal debt sustainability based on current macroeconomic inputs.
The study shows that the debt burden does not have a strict absolute limit (for example, 150% or 200% of GDP). The danger arises at a time when the rate of increase in the cost of debt servicing steadily exceeds the growth rate of the economy itself (rule r > g). If the real interest rate on debt remains high, and GDP growth slows due to higher business loans, the budget loses its ability to mathematically stabilize the debt-to-GDP ratio.
According to PWBM's findings, financial markets will not wait for a technical default. A turning point occurs when investors realize the government's inability to stabilize the budget through tax increases or spending cuts. The current deficit, compounded by rising defense spending and commitments to Medicare and Social Security programs, makes fiscal consolidation extremely difficult politically, especially given the increasing polarization in American politics over the past decade.
Analysts note that the window of opportunity for course adjustments is rapidly narrowing. Early models assumed that the United States had about two decades left before the point of no return. In the conditions of 2026, with an average interest rate on new loans of about 5% and trillion-dollar refinancing needs, this horizon has narrowed. If inflationary crises like the Middle East become chronic, the market will begin to demand an additional premium for the risk of holding American securities in a much shorter time.
At the moment, US debt obligations continue to be considered the most liquid instrument in the world, but for the first time in a long time, the price of this liquidity began to pose a direct threat to the basic functions of the American state. The U.S. economy will have to adapt to a regime in which financing past commitments limits opportunities for future growth.
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