Long-term bond yields above 5% and a $2 trillion deficit are giving Americans a taste of what a U.S. debt crisis would be like. A true emergency would hurt much more, and isn’t baked in. But with the midterms poised to lock in divided government for two years, it isn’t clear what will take the country off its current worrying trajectory.
Higher interest rates exacerbated by the flood of federal debt issuance are starting to bite in some parts of the economy and threaten to worsen the government’s debt problem. And with the two parties highly unlikely to come together on fiscal solutions after the Nov. 3 midterms, any fixes are years off in the future.
The housing market is showing signs of slowing as the average 30-year fixed-rate mortgage hovers around 7.5%. Pending home sales fell 4% in September, Redfin said Monday, the biggest monthly drop in three years.
Mortgage rates track the 10-year Treasury yield. The 10-year has climbed 114 basis points, or hundredths of a percentage point, since the end of February through midday Friday, when the 10-year traded at 5.1%.
Several factors are pushing up the 10-year, including the war with Iran, which kicked off on Feb. 28 and precipitated the rise in long-term yields. Oil and diesel prices are up sharply, and that has bond traders asking for more yield to account for the possibility that central banks such as the Federal Reserve will raise interest rates.
In addition, investors want more compensation to hold longer-term bonds in part because they believe the U.S. government will continue to flood the market with them. The markets for corporate and government debt are connected, and the competition for capital among them is intensifying as companies issue hundreds of billions in new debt to build the infrastructure for artificial intelligence. Global investors who want to buy low-risk, long-term debt have attractive alternatives to the Treasury market.
If the U.S. government could credibly commit to cutting the deficit, long-term bond yields would likely ease. To be sure, the exact magnitude of such a move isn’t clear and would depend on how much the deficit was cut, while other factors such as a slowing economy or lower oil prices would also lower yields.
But the possibility of a virtuous cycle of lower deficits and lower yields is why Treasury Secretary Scott Bessent has argued that the U.S. ought to target a deficit lower than 4% of its gross domestic product by the end of President Donald Trump‘s term.
There is almost no way the U.S. will hit that target. The deficit was $1.992 trillion for the 2026 fiscal year, up 12% from last year, data released Friday by the U.S. Treasury showed. That deficit amounts to approximately 6.2% of gross domestic product, based on an estimate of third-quarter GDP.
Higher rates make debt reduction tougher. If interest rates stay a half-point above the CBO’s expectations, the cumulative deficit over 10 years will come in $1.9 trillion higher, the agency estimates. If rates overshoot by 1.5 points, that adds $6 trillion in deficits.
The CBO expects the 10-year Treasury to average 4.3% over that period, compared with 5.1% today. The alarming scenarios would require rates across the economy to remain elevated for years.
“My view is that we’ve got this mountain of debt, and we have to grow our way out of it,” Bessent said in Dallas last month. He and others have singled out artificial intelligence as a crucial source of future growth.
AI could help but can’t fix the problem entirely. It would take a decade of 7.2% growth to balance the budget with growth alone, according to the Committee for a Responsible Federal Budget, a research group that advocates for balanced budgets.
GDP growth was recently revised up for the second quarter from 1.5% to 2.2% at an annualized rate. The acceleration that quickly would get us to 7.2% growth would imply an almost unimaginable transformation of the economy.
Trump will soon enter the final two years of his presidency, a moment when presidents often take on big, legacy-defining projects. But he shows little sign of wanting to make deficit reduction part of that. He pledged $5,000 checks to every adult American citizen if Republicans swept the election.
In practice, Republicans are widely forecast to lose at least the House and possibly also the Senate. Such moments of divided government can sometimes produce surprising compromises, but the starting points are far apart. Rep. Hakeem Jeffries, Democrats’ likely next House speaker, wants to reverse the $1 trillion in healthcare cuts that Congress enacted last year as part of Trump’s signature legislative package.
And that’s leaving aside the deep animosity between the parties.
The overall U.S. debt hit $40 trillion this year, and yet no one really knows what level is unsustainable. A full-on debt crisis likely remains much further out in the future. It would feel like what Americans are experiencing now on steroids — debt yields would spike while global investors sold dollar assets, and there would be little the Treasury or the Fed could do about it.
For now, though higher yields are also attracting investors to U.S. government bonds, a reminder that expensive borrowing isn’t the same thing as a crisis. But the bottom line is that economics alone can’t solve the problem. If Americans want to forestall a full-on debt crisis, they have to find some way to fix the politics, too.
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