U.S. government debt reaches $40tn as borrowing pace intensifies

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US debt reaches $40tn

Highlights

U.S. gross federal debt surpasses $40tn, rising by $3tn over the past year at the fastest pace outside of the pandemic era.
Debt held by the public exceeds $32tn, pegged at U.S. GDP size, with the Congressional Budget Office projecting it to reach 120 per cent of GDP by 2036.
The Treasury doubles purchases of long-term government debt to contain a recent sell-off as 30-year bond borrowing costs hit their highest since 2001 and 10-year yields reach 2007 levels.

Debt milestone and market pressure

As reported by Financial Times, citing the U.S. Treasury Department, gross federal debt crosses the $40tn threshold on Tuesday, with the data released on Wednesday showing borrowing continues to accelerate. Financial Times calculations show the total rises by $3tn over the past year, the fastest pace outside the pandemic era.

National debt has climbed sharply over the past two decades from less than $6tn at the turn of the century, as heavy spending during the financial crisis and the Covid pandemic widens budget deficits. Over the past 10 years alone, the overall debt burden doubles, while debt held by the public, a closely watched market measure that excludes intragovernmental holdings, now exceeds $32tn, roughly matching the size of the U.S. economy.

The Congressional Budget Office expects debt held by the public to move above the post-second world war high of 106 per cent of GDP by the end of the decade and to reach 120 per cent by 2036. As debt expands, investors demand a higher premium to hold U.S. bonds, lifting interest rates and pushing debt servicing costs above federal defence spending.

That strain is feeding into Treasury financing conditions. The Treasury says on Wednesday, before the debt data release, that it will double purchases of long-term government debt to help contain a recent sell-off, while the U.S. pays its highest borrowing costs for 30-year bonds since 2001 last week and a 10-year note auction on Wednesday fetches the highest yields since 2007.

Fiscal policy strains and wider economic risks

President Donald Trump returns to office in 2025 pledging to curb wasteful government spending, and Treasury secretary Scott Bessent vows to reduce the budget deficit to 3 per cent of GDP by the end of Trump's term. But spending cuts in some areas are offset by large tax reductions in the 2025 One Big Beautiful Bill Act, which is set to add more than $4tn to debt by 2034, while Trump also calls for annual defence spending to rise by more than half to $1.5tn.

The deficit shrinks to 5.9 per cent of GDP in 2025 from 6.3 per cent a year earlier, and the Congressional Budget Office expects it to edge down to 5.8 per cent this year. Analysts say both major U.S. political parties have missed chances to make significant spending reforms even during periods of economic growth.

Budget experts warn that persistent deficits of about $2tn a year leave the U.S. more exposed if economic conditions weaken or overseas conflicts intensify. Congress's Joint Economic Committee calculates the national debt increases by about $7.9bn per day over the past year, and policy groups say the $40tn threshold should serve as a warning that continued borrowing could trigger higher rates and further market unease.

Our earlier coverage of the U.S. Treasury’s long-term buyback expansion explained why officials doubled repurchase sizes for 10–30 year Treasuries to support liquidity after a sharp sell-off pushed long-bond yields higher. We also noted that the move came as rising deficits and climbing interest costs intensified pressure on the federal balance sheet and contributed to investors demanding a higher term premium.

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