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The federal government is now spending more on debt interest than on Medicaid, national defense, or all non-defense discretionary programs combined. And with the 30-year Treasury yield surging past 5.19% — its highest level in nearly two decades — a leading fiscal watchdog is warning that what was already a crisis could spiral into something far worse.
The Numbers Behind the Warning
According to the Committee for a Responsible Federal Budget (CRFB), interest costs consumed a record 3.25% of GDP and roughly 19% of all federal revenue in fiscal year 2025.
If Treasury yields remain at current levels — about 55 basis points above Congressional Budget Office projections — interest costs would grow 2.5-fold, climbing from $880 billion today to $2.5 trillion by 2036. That would push debt interest’s share of federal revenue to nearly 30% — almost triple its historical average.
The Compounding Spiral
The danger isn’t just the size of the numbers — it’s the mechanics. When the average interest rate on the national debt exceeds the economic growth rate (what economists call r > g), debt can begin rising uncontrollably. Under the elevated-rate scenario, that gap would reach 75 basis points by 2036, making it increasingly difficult for even responsible fiscal policy to stop the spiral.
“The combination of high debt levels and a large gap between r and g can lead to a debt spiral — where rising interest costs boost debt, rising debt boosts interest rates, and rising rates boost interest costs further.” — CRFB
Market Drivers Behind the Surge
1. Strait of Hormuz Closure
The closure has rattled energy markets and stoked inflation fears. About two-thirds of investors surveyed by Bank of America Research now believe the 30-year yield could break 6% within the year.
2. Fed Chair Uncertainty
Kevin Warsh, Trump’s pick to chair the Federal Reserve, is described by University of Virginia economics professor Eric Leeper as an “unknown quantity.” Markets are pricing in the uncertainty: “It’s not so much that people have no confidence in Warsh — it’s that they’re not sure what they’re getting.”
3. Weak Treasury Demand
A recent auction of 30-year T-bills at a 5% rate drew only “middling” demand, according to the Financial Times — a weak signal from investors who fear inflation will erode long-term returns.
The Consumer Impact
Higher Treasury yields cascade into the real economy:
| Mortgage Size | Monthly Increase | Lifetime Cost Increase |
|---|---|---|
| $500,000 | ~$200/month | ~$65,000 |
| $1,000,000 | ~$350/month | ~$130,000 |
What to Watch
By 2027, under the high-rate scenario, interest costs would overtake Medicare spending to become the second-largest government program — eclipsed only by Social Security. By 2036, the government would spend nearly as much on interest as on Social Security’s entire retirement program.
Investor Takeaways
- Fixed-income investors: Higher yields create opportunity but watch for duration risk if rates keep climbing
- Mortgage REITs (NLY, AGNC): Spread compression risk as funding costs rise
- Homebuilders (DHI, LEN, TOL): Affordability headwinds from rising mortgage rates
- Banks (JPM, BAC, WFC): Net interest margin expansion potential, but loan demand may soften
- Utilities (XLU): Dividend-sensitive sector faces competition from higher bond yields
CRFB’s prescription is blunt: lawmakers must work to bring interest rates down and prevent high rates from crowding out other priorities. The most effective lever, the group argues, is deficit reduction — which can ease near-term inflationary pressure, reduce long-term yields, and shrink the debt stock.
“With debt approaching record levels, there is little time to lose.” — CRFB
This analysis is for informational purposes only and does not constitute investment advice. Always conduct your own research before making investment decisions
