Year after year, the federal government has spent more than it collected in taxes. Each annual shortfall increased the national debt, slowly at first and then by leaps, defying warnings of an inevitable reckoning.
Now, the reckoning may be at hand.
This week’s bond market sell-off brought government borrowing costs to their highest level in almost two decades and prompted an extraordinary Treasury Department intervention.
On Friday, the yield on the 30-year Treasury bond topped 5.27 percent, up slightly from one day earlier, a sign that Treasury Secretary Scott Bessent’s plan to calm markets is not working. After decades of free spending, Washington may soon be compelled to make some long-deferred, and politically unpalatable, choices that will leave few Americans unscathed.
“This is what the bond market is trying to signal: We’re going to have to make choices that hurt growth,” said Adam Abbas, who manages $4 billion in bonds for the Oakmark Funds. “We have two levers to do that: raise taxes or cut spending. Either option is not politically popular, and it will never be popular, but at some point we have to address the problem.”
The problem is a $40 trillion national debt, along with crisis-level annual budget deficits that require significant new borrowing.
When the Treasury Department woos investors for its bonds, it competes with other governments and corporations — notably the hyperscalers building the nation’s artificial intelligence infrastructure. All that competition for capital means investors can demand higher returns, or yields, from those that want their money.
Fiscal watchdogs have warned for decades that rising U.S. debt will eventually trigger a crisis. As borrowing costs rise, debt becomes more expensive in what can become a vicious cycle, said Marc Goldwein, senior policy director for the nonpartisan Committee for a Responsible Federal Budget.
“What I worry about is we’re on the verge of sort of a real debt spiral, which happens when your interest [bill] is growing faster than your economy,” Goldwein said.
Fast-rising bond yields or interest rates often reverberate through the financial system in unexpected ways, exposing costly vulnerabilities. In 2023, for example, Silicon Valley Bank failed after rising bond yields blew a hole in its balance sheet.
Today, potential weak spots in the financial system include some of the nation’s largest hedge funds, where borrowed money used for investments, or leverage, is “near all-time highs,” according to the minutes of the Fed’s July 28-29 meeting. Likewise, traditionally staid life insurers are holding riskier assets that would be difficult to unload quickly if they needed to raise cash during a crisis.
Financial setbacks also could occur overseas in places like France or Japan, said Rebecca Patterson, former chief investment strategist for Bridgewater Associates and now a senior fellow at the Council on Foreign Relations
“When we’re thinking about what could cause a crisis in the U.S., don’t just think about what’s happening in the U.S. Think about other markets that could be vulnerable,” she said.
The U.S. now spends more than $1 trillion each year paying interest on the national credit card, more than it devotes to Medicare, according to the nonpartisan Congressional Budget Office. As recently as 2010, the interest bill was less than one-fifth that amount.
