U.S. deficits keep borrowing costs in focus as debt burdens rise

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U.S. deficits and debt rising

Highlights

The U.S. federal budget deficit for fiscal year ended September 30 reached approximately $2 trillion, up 12%, marking the largest gap since the COVID-19 pandemic.
U.S. debt service costs hit a record $1.36 trillion while Treasury bondholder debt stands at $32 trillion, pushing the debt-to-GDP ratio to about 100%.
The 30-year mortgage rate has climbed to 7.40%, up from around 3% in the 2010s, intensifying consumer pressure as borrowing costs rise ahead of the November 3 elections.

Debt load and fiscal strategy under scrutiny

As reported by Reuters, the Treasury said on Friday that the federal budget deficit for the fiscal year ended September 30 was roughly $2 trillion, up 12% from a year earlier and the largest since the spending surge during the COVID-19 pandemic.

The fiscal 2026 deficit is the third largest on record, while debt service costs reach a record $1.36 trillion. U.S. government spending exceeds receipts by about 6.2% of the total economy, well above the roughly 3% annual deficit level that analysts say is typically sustainable given normal economic growth.

Analysts say bond markets are lifting borrowing costs globally, and measures of term premium do not currently point to a sharp deterioration in perceived U.S. credit quality. Even so, they warn that the Trump administration has not taken concrete steps to narrow deficits or contain borrowing costs beyond arguing that stronger economic growth can improve the fiscal outlook.

The administration also says its tariff policy can help ease fiscal strain. But after the Supreme Court earlier this year struck down many of those tariffs, the government has to pay $145 billion in refunds, offsetting much of the earlier revenue gain from import taxes.

Higher yields raise pressure on households and markets

Debt owed to Treasury bondholders stands at around $32 trillion, close to the size of the U.S. economy, while the debt-to-GDP ratio is now about 100%, a level last seen during World War II financing. Economists remain divided on whether that level marks a clear danger point, although they broadly view a U.S. default as highly unlikely.

Still, some Federal Reserve officials warn that a future fiscal reckoning remains possible, with the outcome depending on economic growth and policy choices. Analysts say the combination of higher debt, higher rates and continued borrowing could be difficult to reverse through growth alone, especially as the U.S. competes for capital with other stable sovereign borrowers and corporations investing in artificial intelligence.

Those pressures are already reaching consumers. Treasury Secretary Scott Bessent has tried to contain yields, but the 10-year Treasury note continues to rise, and the rate on a 30-year mortgage recently hits 7.40%, according to Freddie Mac, compared with the roughly 3% levels common in the 2010s.

With Republicans defending control of Congress in the November 3 elections, rising borrowing costs are adding to voter concerns over living costs. Carolyn Bourdeaux, executive director of Concord Action, says candidates should explain how they would put the federal budget on a sustainable path.

In our earlier article on rising long-term Treasury yields and the near-$2 trillion U.S. deficit outlook, we explained how higher rates are flowing through to mortgage costs, federal interest expenses, and tighter financing conditions across the economy. We also noted that competition for capital—including heavy issuance tied to AI investment—and political gridlock after the Nov. 3 midterms could limit the prospects for a near-term deficit-reduction deal, even as total debt and debt-service costs continue to climb.

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