The U.S. government’s fiscal outlook has become markedly worse in the last couple of months — not because of anything happening on Capitol Hill, but because of shifts in global bond markets.
Why it matters: An upward shift in long-term interest rates is putting the government on track to spend much more on interest payments in the coming years than was anticipated just a few months ago.
- If current rates stay high and fiscal policy matches current forecasts, the cost of servicing those debts will surpass defense spending in 2025 and top Medicare spending in 2026.
- In the current fiscal year, interest spending is on track to surpass $800 billion, more than double 2021’s $352 billion figure. In 2026, the government’s net interest expense would reach 3.3% of GDP, the highest on record.
- Those numbers are from the Committee for a Responsible Federal Budget, on the assumption that rates remain 1 percentage point higher than in the Congressional Budget Office’s forecasts, based on the CBO’s rules of thumb.
By the numbers: In July, the CBO fiscal projections assumed that the 10-year U.S. treasury bond would yield 3.8%, which was about where the securities were trading at the time.
- Not anymore. Since then, the 10-year yield set new modern highs, surpassing 4.8% on Oct. 6 (it was 4.71% on Monday morning).
Read More: What long-term bond yields mean for U.S. fiscal outlook (axios.com)