If the nation’s debt has you bracing for a fiscal doomsday, you may want to save that stress for another crisis.
Yes, the United States crossed two unsettling benchmarks this week — the kind policymakers would rather not highlight: total debt reaching $40 trillion and interest rates climbing to heights not seen in roughly 20 years.
Yields on the 30-year Treasury bond are now comfortably above 5%, while the 10-year Treasury appears to be drifting toward that same psychologically important — and potentially troubling — 5% level.
At first glance, the federal debt picture looks grim. Washington keeps spending, and neither Democrats nor Republicans have shown much appetite for serious entitlement reform. Meanwhile, investors buying US government debt are demanding a higher yield — essentially a bigger risk premium — to offset concerns about fiscal excess.
Those rising yields also point to renewed fears that inflation could flare up again. Bonds are long-term fixed-income investments, which means they are especially vulnerable when inflation erodes the value of their principal over time.
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The war involving Iran is adding pressure through higher gas prices, and Trump’s tariff plans are not helping matters. As one prominent bond investor told me, “Given what’s going on, the spike in yield underestimates” the scale of the problem.
The bleakest version of the story is that the US is heading into a full-blown debt crisis — one that could trigger punishing interest-rate increases and a sharp sell-off in the stock market.
But according to sources I’ve spoken with, that outcome remains unlikely.
For the record, I’m no fan of deficits, particularly ones that run more than 100% of GDP. In theory, there’s only so much capital to go around. The people with the money — foreign investors (a k a the Chinese), hedge funds, US pensions — can’t keep buying our debt forever.
And Uncle Sam now competes with Open AI, Anthropic and every tech company involved in the AI rollout for financing. There are other places to park your money.
Meanwhile, who wants the Chinese to own so much of our debt and have the ability to press the sell button and send rates soaring?
On the other hand, it’s exactly because of AI and those investment options that our economy is humming along. The United States is still an innovator.
Plus I’m not convinced — and neither are my market sources, people like my “Risk and Return” podcast partner Bob Sloan of S3 Partners — that long yields are historically high.
They may be the highest since 2007. But go back a bit further, say to 2002, and both the 10 year and 30 year were trading in the same range.
And yet, the debt at the time was just $6.41 trillion; we basically had a balanced budget. Our debt-to-GDP ratio was half of what it is today, around 57%. So bond yields then weren’t an indicator of economic disaster.
The Chinese could sell all their holdings of US treasuries, but they bought them for a reason: The dollar is still the world’s reserve currency. Selling them would cause massive losses, not just their holdings, but to world-wide markets, hurting Chinese export-driven economy.
The government needs to make smarter choices, that’s certain. In the meantime, though, don’t panic. A $40 trillion debt is nothing to crow about. But at the end of the day, it’s a figure, not a harbinger.
