Rising Interest Rates Could Push Debt Higher

The 10-year Treasury yield is currently 4.5% – the highest rate in over a year – while 30-year Treasuries now carry a 5.0% interest rate. In fact, interest rates have been on the rise across nearly every maturity.

The recent increase can be attributed to several factors, including the conflict in Iran, which has partly contributed to higher-than-expected inflation hitting a three-year record on Tuesday. Poor Treasury auctions in March and this week have also added to uncertainty among investors. Furthermore, our high and rising national debt puts pressure on interest rates and increases interest costs, which have greater implications for our debt sustainability.

The rates on 10-year notes and 3-month bills are both currently about 40 basis points above projections from the Congressional Budget Office (CBO). If rates remain 40 basis points above projections over the next decade, it would add $1.5 trillion to debt and cause debt as a percentage of Gross Domestic Product (GDP) to rise from 100% today to 124% by Fiscal Year 2036, as opposed to the 120% projected by CBO. Even if rates remain elevated for only one year, we estimate it would add nearly $200 billion to debt by 2036.

High debt can put additional pressure on interest rates, further increasing debt and potentially leading to a debt spiral – or even a fiscal crisis. The best prevention against rising interest rates and rising interest costs is to lower deficits and put debt on a sustainable path.