(Bloomberg) — The U.S. government’s debt interest burden hit a record high for fiscal 2026, swallowing up a growing share of federal revenues and risking a borrowing snowball that could leave the country more vulnerable to economic shocks.
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For the year through September, net interest expense was $1.05 trillion, up more than 8% from $970 billion in fiscal 2025, Treasury Department data showed Friday. The Peter G. Peterson Foundation, a research group, estimates that costs could reach 3.2 percent of gross domestic product, surpassing the previous record set in 1991. GDP figures for the latest quarter are expected later this month.
The increase reflects both the fact that there is much more debt to pay interest on – one key measure is over $32 trillion, some $10 trillion more than just five years ago – but also much higher interest rates. The average rate paid by the government on negotiable Treasury bills was 3.52% at the end of September, more than double the rate of 1.47% five years earlier.
What’s worse is that current yields are even higher, with the current Bloomberg US Treasury Index now hovering around 5%. Rising rates have prompted Treasury Secretary Scott Bessent to take extraordinary measures to contain the rise, even as economists say the country remains far from crisis. Demand at debt auctions has proven to be strong and rising borrowing costs are not hampering credit flows.
“It doesn’t feel like a crisis, it’s kind of a slow eating away” of fiscal capacity, said Louise Sheiner, a senior fellow at the Brookings Institution and a former economist at the Federal Reserve. What is not known is when “some lenders will decide not to lend to us – and if that happens, it could lead to a fiscal crisis”, with the Treasury losing access to raising funds in the markets, she said.
Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, said the fact that the country’s nominal GDP growth rate – which is key to things like corporate income and tax revenues – is higher than U.S. Treasury yields, allays deeper concerns for now. The nominal year-on-year GDP increase for the second quarter was 6.3%. “A fiscal apocalypse is not yet upon us,” Goldberg wrote in a recent memo.
Manage, for now
“Somehow we’re getting there, even with interest rates rising,” Phillip Swagel, director of the Congressional Budget Office, said at an Oct. 8 event in Minneapolis. At the same time, he warned that the deterioration of fiscal dynamics makes the country increasingly vulnerable. “Every time there is a negative shock, interest rates rise for whatever reason,” there can be a “turbocharger effect.”
In this scenario, the shock of rising rates “fuels the deficit, fuels the debt, and passes interest rates through the economy,” said Swagel, whose agency predicted in February that the debt-to-GDP ratio would reach a record topping 106% in 2030. The former Treasury official also said that while he has been delivering the same budget message for a long time, market participants have been more interested in the past two years.
Interest costs are now one of the three largest items on the list of federal spending, having more than doubled since 2022 alone. They are surpassed only by Social Security and Medicare, the giant federal programs for older Americans, whose costs rise each year as the number of beneficiaries increases by millions. The Department of Defense and Medicaid round out the top five.
The last time interest costs as a percentage of debt were near current levels, U.S. policy prepared for the challenge. President George HW Bush reneged on his promise not to impose new taxes by signing a package of tax increases in 1990, just before the interest-cost ratio peaked. His successor, Bill Clinton, increased the levies further in 1993.
Waiting for a catastrophe?
The end of the Cold War was also marked by a decline in defense spending, thereby strengthening the budgetary situation. At the end of the 1990s, the resumption of economic growth, linked to the diffusion of the Internet and personal computing, propelled incomes.
Today, Bessent and other Trump administration officials are touting the artificial intelligence boom as a growth booster that will help reduce debt levels. Budget experts, however, are skeptical. Spending on defense and social programs looks set to continue to rise, while GDP gains likely won’t be fast enough to sufficiently fuel revenue, they say.
“The problems are only getting worse, so we shouldn’t be debating whether to wait for disaster to happen — we should be working on it now,” said Brett Loper, executive vice president of policy at the Peterson Foundation. “It’s going to be very difficult to get out of this problem.”
The increase in net interest payments this year, to $81.4 billion, could be eclipsed if rates continue to rise. The Fed is expected to raise its benchmark overnight rate at least once more — currently between 3.75% and 4% — which would drive up the cost of short-term debt that Bessent increasingly favors.
A 100 basis point rise in the yield curve would increase interest costs by $310 billion in 2027, according to calculations by TD Securities.
“I don’t think a fiscal crisis is imminent, we still have a pretty strong economy,” said Karen Dynan, an economics professor at Harvard University who worked at the Treasury during the Obama administration. And rates still haven’t returned to the levels of three or four decades ago, she noted.
At the same time, “with debt this high, the net interest payments are really important – they will lead to a debt explosion,” she said. “Increasing interest rates and interest payments relative to GDP could spur public opinion into action.”
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