U.S. government net interest costs reached an estimated $1.05 trillion in the first 11 months of fiscal 2026, while household spending rose 6.1% in the 12 months through August, the Commerce Department reported. The numbers put rising consumer purchases beside the swelling cost of servicing public debt. Meanwhile, the 10-year Treasury yield climbed above 5%.
Spending and insecurity
Household spending accelerated from annual growth of 4.3% at the end of last year. Consumers kept buying food, travel, couches, Halloween decorations and other goods and services despite inflation and their gloomy views of the economy.
At Chicago’s Bar Roma, customers ordered $10 cocktails and $11 bruschetta. Kathleen Harper and her husband would normally share a few appetizers. This time, they chose the $50 tasting menu. “After a long day—I work from home—I like to just get out of the house,” Harper said.
Harper sells fraud-protection services. “Business has been good, because fraud, unfortunately, is up,” she said. She worries about the economy and rising gas and grocery prices, but felt secure enough to enjoy a happy-hour deal.
The latest available data, from the second quarter of 2026, showed economic growth revised upward during the week, driven by consumer spending and business investment. Nominal U.S. gross domestic product grew at an annualized rate of 8.5% in the quarter, according to the latest Bureau of Economic Analysis estimate.
The cost of borrowing
The Congressional Budget Office projected federal debt held by the public at about 101% of GDP in fiscal 2026. Higher yields increase the government's financing costs as debt matures and Washington issues new debt. Still, the government doesn't have to refinance all its debt at higher rates immediately, TD Securities analysts said.
TD said U.S. government debt has a weighted-average maturity of about 5.9 years. Treasury securities excluding bills carried an average coupon of 3.1%, while the average interest rate on U.S. debt was about 3.4%, below nominal economic growth.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, warned that rising borrowing costs could drive up debt and interest expenses in a reinforcing cycle. After the 10-year yield crossed 5%, she said in a statement last month, “The real threat is the debt spiral. 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 could start when investors demand higher yields to lend to a heavily indebted government. Washington would then face a larger interest bill and greater borrowing needs, potentially leading investors to demand still higher yields.
TD Securities estimated fiscal 2026 interest expenses at about $1.1 trillion if rates stayed elevated. The firm projected financing costs of $1.4 trillion in fiscal 2027, $1.5 trillion in 2028 and $1.6 trillion in 2029 if yields remained near current levels.
Growth, rates and exposure
Some bond-market experts said the United States remained some distance from a fiscal breaking point. They also said rising yields could reflect economic resilience as well as debt concerns. “A fiscal apocalypse is not upon us just yet,” TD Securities strategists Gennadiy Goldberg and Molly Brooks said in a recent note.
Matthew Reese, head of global bond strategies at L&G Asset Management, called fears of an imminent U.S. fiscal crisis “exaggerated.” The United States retained much of the “exorbitant privilege” of the dollar and its role as the most liquid and still highly rated economy, he said. Reese added that the feedback loop becomes more dangerous when nominal growth falls, causing debt relative to the economy to rise persistently.
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, pointed to economic resilience. He wrote that investors were content with the real economy’s performance while sharing the Federal Reserve’s inflation concerns. In a BMO survey, 42% of respondents named housing as the first area likely to show clear stress from higher real rates; 26% named stocks, 21% corporate credit and 1% the labor market.
Lyngen said the latest jobs data would likely “confirm the resilience of labor market conditions in the face of sticky inflation and elevated borrowing costs.” He wrote that 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.”