Interest rates are rising again at nearly all maturities. The 10-year Treasury note closed at 4.7% on Tuesday, up from 4.1% just six weeks ago and 1.6% at the start of 2022. The yield on the three-month Treasury note is now nearly 5.5%, up from less than 0.1% at the start of 2022. As a result, the federal government is Interest costs are soaring.
Interest rates have been trending higher since the start of 2022 as the Federal Reserve has tried to address surging inflation and rising federal debt, with the 10-year Treasury yield surging nearly 60 basis points in six weeks on news of better-than-expected inflation data, better-than-expected economic data and weak Treasury auctions.
High interest rates, combined with high and growing debt, are causing an explosion in interest costs for the federal government. Interest costs have already hit $429 billion in the first half of this fiscal year, which is 39 percent The total amount of personal income taxes paid so far is projected to reach $870 billion for the year. At that level, interest payments would exceed defense and Medicare spending this year and become the second-largest item in the budget.
By next year, interest is projected to reach a record 3.2% of gross domestic product (GDP), up sharply from 1.5% just three years ago and surpassing the record set in fiscal year 1991. And by 2051, interest costs are projected to reach 5.9% of GDP, making it the largest item in the federal budget.
This poses a problem for debt sustainability: long-term nominal economic growth is projected to average about 4 percent per year, and interest rates on new debt are currently much higher than growth (R>G). This could lead to a dangerous debt spiral, especially as rising debt pushes interest rates higher, stifling economic growth. A one percentage point increase in interest rates above the Congressional Budget Office benchmark would add an additional $2.9 trillion to the debt.
Most of our national debt was issued when interest rates were low, but that debt has been carried over into a high-interest rate environment, and more borrowing continues. Rising Treasury rates put further pressure on our nation's high and growing debt. The best way to mitigate these costs is through thoughtful and responsible fiscal reforms that limit additional borrowing, reduce inflationary pressures, and hold down interest rates.