U.S. household spending rose 6.1% in the 12 months through August, the Commerce Department reported, while borrowing costs for the federal government climbed to their highest levels in decades. Spending growth has accelerated from 4.3% at the end of last year.
Consumers Keep Spending
Americans are buying food, travel, couches and Halloween decorations despite inflation and a gloomy view of the economy. The latest available data, covering the second quarter of 2026, showed economic growth revised upward during the week. Consumer spending and business investment drove that revision.
At Chicago's Bar Roma, the menu tells the story. Customers gather for $10 cocktails and $11 bruschetta. Kathleen Harper and her husband would normally share a few appetizers, but chose the $50 tasting menu instead. "After a long day—I work from home—I like to just get out of the house," Harper said. She sells fraud-protection services. "Business has been good, because fraud, unfortunately, is up," she said. Rising gas and grocery prices still worry her. But she felt secure enough to enjoy a happy-hour deal.
The Interest Bill
Washington's finances look different. The benchmark 10-year Treasury yield sits above 5%. Government net interest costs came to an estimated $1.05 trillion in the first 11 months of fiscal year 2026. That's a trillion-dollar bill just to service debt.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, didn't soften her warning after the 10-year yield crossed 5%. "The real threat is the debt spiral," she said in a statement last month. "If interest begets debt, and debt begets interest, eventually debt will spin out of control. A fiscal crisis, once unthinkable, is now a distinct possibility." Her cycle works this way: investors demand higher yields to lend to a heavily indebted government, raising Washington's interest bill and borrowing needs, which prompts investors to seek still higher yields.
TD Securities estimated fiscal 2026 interest expenses at about $1.1 trillion if rates stayed elevated. If yields remained near current levels, the firm projected financing costs of $1.4 trillion in fiscal 2027, $1.5 trillion in 2028 and $1.6 trillion in 2029. The Congressional Budget Office projected federal debt held by the public at about 101% of GDP in fiscal 2026.
A Debate Over the Danger
Some bond-market experts say the country remains some distance from a breaking point. "A fiscal apocalypse is not upon us just yet," TD Securities strategists Gennadiy Goldberg and Molly Brooks said in a recent note. They pointed out that Washington doesn't have to refinance all its debt at higher rates immediately. U.S. government debt has a weighted-average maturity of about 5.9 years, so higher costs pass through gradually. TD put the average coupon on Treasury securities excluding bills at 3.1%. The average interest rate on U.S. debt, about 3.4%, remained below nominal economic growth. Nominal GDP grew at an annualized 8.5% in the second quarter, TD said, helping keep the debt burden manageable despite large deficits.
Matthew Reese, head of global bond strategies at L&G Asset Management, called fears of an imminent crisis "exaggerated." He acknowledged "valid concerns" about a negative feedback loop as developed economies refinance debt and fund deficits. But he said the U.S. "still retains much of the 'exorbitant privilege' of the US dollar." The loop grows more dangerous, he said, when nominal growth falls and debt relative to the economy rises persistently. TD said a crisis wasn't imminent, though the debt trajectory remained a concern for investors.
Debt may not be the only reason for rising yields. TD listed stronger economic growth, expectations of Federal Reserve rate hikes, higher oil prices, corporate bond issuance and repositioning by fast-money investors as possible factors. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said investors are "content with the underlying performance of the real economy and share the Fed's inflation angst." In a BMO survey, 42% of respondents named housing as the first area to show clear stress from higher real rates. Stocks drew 26% and corporate credit 21%. Just 1% named the labor market. Lyngen said the "only durable constraint on even higher bond yields would be indisputable evidence that either the economy or risk assets are buckling under the pressure of elevated borrowing costs."
Why This Matters:
Consumer strength and Treasury strain are unfolding at the same time. The figures explain why that matters. Roughly $1.05 trillion in net interest in 11 months buys no services and no infrastructure. TD's projections put the bill at $1.6 trillion by 2029 if yields hold. Today's cushion comes from nominal growth of 8.5% outpacing the debt's 3.4% average rate. Reese warned that cushion shrinks if nominal growth falls. From a fiscal-responsibility perspective, spending discipline is the policy lever Washington controls, while markets, as Lyngen noted, will set the limit if the economy falters.