U.S. national debt tops $40 trillion... rising rates and interest costs fuel a vicious cycle

[Financial News New York = Lee Byung-chul]The United States' national debt has surpassed $40 trillion for the first time in history. It rose by $3 trillion in just the past year, marking the fastest pace of increase since the COVID-19 pandemic. As the burden of debt pushed long-term Treasury yields sharply higher, the U.S. Department of the Treasury stepped in to stabilize the market by doubling the size of its long-term bond purchases. Warnings are also growing that rising debt could drive up interest rates again, creating a vicious cycle of higher borrowing costs.
On the 19th local time, major U.S. media outlets including CNBC reported, citing Treasury data, that the federal government's total debt had crossed the $40 trillion mark the previous day. The United States' national debt increased by $3 trillion over the past year. Excluding the pandemic period, that is the fastest pace on record.
The pace of U.S. national debt growth has accelerated further in recent months.
Around 2000, the national debt was still below $6 trillion. It then surged through the financial crisis and the massive fiscal spending during the COVID-19 pandemic. Over the past decade alone, the total debt burden has doubled.
The Congressional Budget Office (CBO) projected that publicly held federal debt will exceed 106% of Gross Domestic Product (GDP) by 2030, breaking the historical peak recorded just after World War II. By 2036, it is expected to rise to 120% of GDP.
The problem is that as debt grows, the U.S. government's borrowing costs are rising as well.
Long-term Treasury yields are climbing quickly as investors demand higher returns to hold U.S. government bonds amid concerns over the huge fiscal deficit and rising bond supply. Interest costs borne by the federal government have already surpassed defense spending.
Mark Goldwein, senior policy director at the Committee for a Responsible Federal Budget, compared the current situation to a car with a giant "check engine" warning light flashing. He said, "It does not mean the engine will fail tomorrow, but it is a strong signal that things are quite out of control," adding, "The issue is not just the size of the debt, but how quickly it has reached this level."
As market anxiety over the debt surge intensified, the U.S. Department of the Treasury also moved to respond.
The Treasury said it would double the size of its long-term bond purchases to calm recent selling pressure in the long-end market. The move is aimed at boosting liquidity in the long-term bond market and easing pressure from sharp rate increases through expanded Treasury buybacks.
Recent issuance costs for long-term U.S. Treasurys have risen to levels seen before the financial crisis.
In last week's 30-year Treasury auction, the U.S. government paid the highest borrowing cost since 2001. At a 10-year Treasury auction held the same day, the winning yield also reached its highest level since 2007.
Ed Yardeni, president of Yardeni Research, said, "There is an enormous amount of money that has to be repaid." He added, "When rates rise because of concerns about the size of the debt, interest costs increase further, which in turn leads to more debt in a vicious cycle."
Michael Peterson, president of the Peterson Foundation, told the Financial Times that the $40 trillion milestone should serve as a warning to policymakers. He said, "If borrowing continues at this pace, there may come a day of reckoning in financial markets, when investors view the United States as riskier, demand higher rates, or move their money elsewhere."



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