U.S. Treasury yields continue to climb as investors factor in the likelihood that surging energy prices will further fuel inflation, as well as expectations that the Federal Reserve will respond with more interest rate hikes after it raised its benchmark rate this month for the first time since 2023. Worries about the growing U.S. debt and competition in bond issuance due to the AI investment boom add more ingredients to the current cocktail of concerns.
The yield on the 30-year Treasury bond briefly rose above 5.5% on Friday for the first time in 22 years before dropping back slightly. The yield on the benchmark 10-year note was little changed on the day after reaching its highest rate since June 2007 on Thursday.
As Treasury yields continue to reach multi-decade highs, the Congressional Budget Office published a new analysis Thursday showing how dramatically the higher rates can affect is projections for the national debt.
The CBO said that an eventual 1-percentage-point increase in rates above the agency’s long-term baseline would raise primary deficits — that is, deficits excluding interest costs — by 0.2 percentage points through fiscal year 2056, raising them to 2.3% of GDP on average. That may not sound like much, but it means that debt held by the public would grow to 222% of GDP by 2056 — 47 percentage points higher than under the current baseline projections. Total deficits from 2026 to 2036 would be about $1.5 trillion larger than in the baseline, and the additional interest costs would rise to $35.7 trillion through 2056, according to the Committee for a Responsible Federal Budget, which advocates for deficit reduction.
CRFB also points out that the CBO analysis “assumes that the average interest rate on the federal debt is below the current 10-year Treasury yield until 2047 — so the actual fiscal situation could be even worse.”
