Is America’s $40 trillion debt driving Treasury yields above 5% as interest costs hit $1 trillion and overtake defense spending?

The bond market just sent Washington a very clear financial warning. The 10-year Treasury yield recently hit 5.04%, reaching levels unseen since 2007. At the same time, the Federal Reserve raised rates for the first time since 2023. While inflation and oil prices sparked the initial shift, analysts point to a deeper structural problem driving yields upward.

In August, the gross national debt crossed $40 trillion. The pace of borrowing is accelerating. The debt hit $38 trillion last October and $39 trillion in March, meaning the government is now borrowing a trillion dollars every five months. With one month still remaining in the fiscal year, the deficit sits at $2 trillion.

The major credit rating agencies have already reacted. In 2025, Moody’s stripped the United States of its AAA rating, joining S&P and Fitch in downgrading American debt.

Why interest costs are becoming a budget problem

The most immediate consequence of this borrowing is the cost to service it. In fiscal year 2025, net interest payments on the national debt reached $970 billion. That figure was roughly $150 billion more than the United States spent on national defense. This year, those interest payments rose another 12%, adding $111 billion to the tab. America now pays its creditors more than it pays to equip and maintain its military.

Interest is currently the fastest-growing major program in the federal budget. The Congressional Budget Office projects these payments will more than double to $2.1 trillion by 2036. The Treasury is essentially managing an economy-sized adjustable-rate mortgage. When rates adjust upward, the interest burden consumes a massive share of federal revenue.

This dynamic quietly threatens the U.S. dollar’s position as the world's reserve currency. That status allows America to borrow cheaply and run deficits that would trigger financial crises in other nations, but that privilege relies entirely on global confidence that the government can manage its balance sheet.

Despite the math, legislative action remains paralyzed by institutional dysfunction. The Congressional Budget Act of 1974 laid out a clear process for passing 12 annual appropriations bills. Over the last half-century, lawmakers have completed that process on time exactly four times.

This year, with zero bills enacted by the deadline, Congress simply delayed funding decisions until December 11 so members could return home to campaign.

Lawmakers routinely bypass their own fiscal guardrails. Statutory PAYGO rules theoretically require new spending to be offset by new revenue. In practice, Congress frequently designates spending as an "emergency" to exempt it from these rules. The automatic cuts designed to enforce budget limits are regularly waived on the final pages of massive omnibus spending bills.

Financial oversight is equally strained; the Pentagon has failed eight consecutive audits, previously failing to fully account for 61% of its $3.5 trillion in assets.

Meanwhile, the bitter spending fights broadcast on cable news usually focus on just 27% of the budget. Discretionary spending gets the spotlight, while mandatory spending (60%) and interest on the debt (13%) are largely ignored during public debates.

The Congressional Budget Office continues to warn that rising debt risks a sudden loss of investor confidence and an abrupt spike in rates.