As debt surpasses $40 trillion, the bill for Washington spending comes due

The Bond Market Sends a Warning

On Friday, the yield on the 30-year Treasury bond topped 5.27%, up slightly from a day earlier. That marks the highest level in almost two decades, a sign that Treasury Secretary Scott Bessent's plan to calm markets is not working.

The bond market sell-off this week pushed government borrowing costs to their highest level in nearly 20 years and prompted an extraordinary Treasury Department intervention. But investors remain skeptical, and the message from the market is clear: Washington must confront its debt problem.

"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 Numbers Behind the Crisis

The national debt now stands at $40 trillion. The annual interest bill exceeds $1 trillion, more than what the government spends on Medicare, according to the Congressional Budget Office (CBO). The CBO estimates a record $2.1 trillion deficit this year.

Those figures are stark compared with the past. Between 1789 and 2016, the U.S. government borrowed just over $19 trillion. Over the past 10 years, Presidents Trump and Biden added another $20 trillion, doubling the national debt.

The interest bill in 2010 was less than one-fifth of today's level. In 1997, the 30-year yield was around 6%, but the economy was growing as fast as 6.8%, and the national debt was less than half of GDP relative to today's share.

Today, the yield on the 30-year Treasury is 5.27%, but economic growth is far slower. Douglas Holtz-Eakin, an economist and former Congressional Budget Office director, attributes the current supply-side situation to demographics, an aging population, diminished immigration, and the impact of tariffs and the Iran war.

The Global Context

Global debt of all types has hit a record $353 trillion, more than three times global output, according to data cited in the article. Governments have been the biggest borrowers since 2008 and the pandemic. Poorer nations in Africa and Asia borrowed heavily to finance higher energy and food bills following the wars in Ukraine and Iran.

"The debt has transferred to governments," said Rebecca Patterson, former chief investment strategist at Bridgewater Associates. "It's not only a U.S. story." Patterson cites France and Japan as possible weak spots.

The Risk of a Debt Spiral

Fiscal watchdogs have warned for decades that rising U.S. debt will eventually trigger a crisis. As borrowing costs rise, debt becomes more expensive, creating a vicious cycle.

"What I worry about is we're on the verge of sort of a real debt spiral, which happens when your interest [bill] grows faster than the economy," said Marc Goldwein, senior policy director for the nonpartisan Committee for a Responsible Federal Budget.

The bond market's reaction to the debt is reminiscent of 2023, when Silicon Valley Bank failed after rising bond yields opened a hole in its balance sheet. Hedge fund leverage is near all-time highs, according to the minutes of the Federal Reserve's July 28-29 meeting. Life insurers hold riskier assets that could be hard to sell quickly in a crisis, raising concerns about broader financial stability.

The Political Challenge

Addressing the debt will require politically difficult choices. Independent analysts say some combination of higher taxes and cuts to Social Security and Medicare are unavoidable.

Sen. John Curtis (R-Utah) called the spending problem "immoral," saying it leaves children and grandchildren with the bill. Curtis is the lead sponsor of a bipartisan commission to bring the national debt under 100% of GDP by 2039. However, Curtis voted for President Trump's tax law that the CBO says will add $4.7 trillion over a decade.

Sen. Bill Cassidy (R-La.) sponsored another commission bill and said a commission shouldn't venture beyond Social Security at first. "Crawl before we walk," Cassidy said.

The Social Security trust fund will be short of full benefits by 2032, mandating a 22% benefit cut. Jason Fichtner, a former deputy commissioner of Social Security, warned that the bond market's fears will rise as trust fund depletion approaches. He said he does not see a government default or bankruptcy, but he does see higher living costs for everyone.

The Role of the Treasury

Treasury Secretary Bessent promised an "increased" focus on finances and a review of the revenue and cost side. He said Vice President Vance's anti-fraud task force would save "several hundred billion dollars." But the Department of Government Efficiency (DOGE) has upended the civil service, and its savings claims are overstated.

The White House Council of Economic Advisers (CEA) projected a $1.7 trillion deficit before tax legislation. The CEA sees average annual growth of 2.8%, compared with the CBO's 2%.

Barclays expects fiscal consolidation "unlikely to be realized" before the November elections, leaving the debt problem to fester.

The Bottom Line

With the 30-year yield at a two-decade high, the bond market is forcing the issue. The choices ahead — raising taxes, cutting spending, or both — are unpopular and politically fraught. But the longer they are delayed, the more painful they will become.

As Abbas put it: "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."