The surge in Treasury yields is raising concerns in Congress as their precipitous rise in recent months further dims the outlook for U.S. debt.
The 10-year yield climbed to 5.23% on Friday, its highest level since 2007 and more than a percentage point since just before the start of the Iran war. At the same time, the 30-year yield reached 5.49%, its highest level since 2004.
With oil prices rising due to conflict in the Middle East, AI hyperscalers spending hundreds of billions annually, the economy overheating, and U.S. debt now at $40 trillion, Treasury yields have already exceeded the Congressional Budget Office’s long-term outlook.
According to its latest forecasts published in February, the 10-year yield was estimated at 4.1% this year, 4.2% in 2027, 4.3% from 2028 to 2031 and 4.4% from 2032 to 2036. These projections now seem outdated.
In addition to setting the tone for other borrowing costs, yields determine how much the Treasury Department must pay in interest on U.S. debt, which can accelerate as rates rise.
Annual interest charges on the debt already stand at $1 trillion, while the budget deficit is on track to reach $2 trillion this year, with no sign of political will to bring them under control.
The sudden rise in yields prompted Sen. Jeff Merkley, the top Democrat on the Senate Budget Committee, to request new numbers from the CBO. In a letter responding to the senator, CBO Director Phillip Swagel outlined a scenario in which interest rates rise to 1 percentage point above the baseline.
Before incorporating macroeconomic effects, the CBO estimated that the primary deficit, which excludes net interest spending, would be 0.4 percentage points higher by 2056 than the baseline forecast. But the total deficit would be 4.9 percentage points higher, indicating how much of an additional burden interest spending will be.
In addition, the total deficit would reach 14% of GDP, compared to 5.8% expected for this fiscal year and 3.8% on average from 1976 to 2025.
At the same time, public debt would explode to 222% of GDP by 2056, in the event of an interest rate increase of 1 point. This is an increase from the current 101% of GDP and 47 percentage points higher than the CBO’s current baseline forecast for 2056.
Congressional Budget Office
As debt increases, the U.S. economy will slow and will not be able to keep pace with borrowing because capital will be funneled into Treasury bonds rather than more productive uses.
The CBO said GDP growth would be 0.1 percentage points below its baseline. This dims hopes that the United States can dig itself out of debt. Treasury Secretary Scott Bessent said this would be possible if growth reached 3%.
The CBO also suggested that its numbers in this scenario would be even worse after taking into account the effects on the economy as a whole.
“The resulting increase in debt as a percentage of GDP further increases interest rates on Treasury securities,” Swagel added. “Thus, macroeconomic effects push interest rates above the initial rise predicted in the scenario. »
For comparison purposes, the CBO presented an alternative, albeit fantastical, scenario in which the debt-to-GDP ratio remains stable at its current level of 101%.
In this utopia of fiscal prudence and frugality, the primary deficit would be 2 percentage points lower than the CBO baseline by 2056, the total deficit would be 5.6 percentage points lower, and the public debt would be 74 percentage points lower.
And even though GDP growth would be only 0.05 percentage points higher than the CBO’s baseline scenario, that doesn’t account for additional macroeconomic spillovers.
“Increased GDP growth encourages more investment, thereby increasing the amount of capital available to workers,” Swagel wrote. “This higher capital stock increases the marginal product of labor, encouraging more work, which results in further GDP growth. »
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