US government debt has crossed the $40 trillion mark for the first time, raising fresh concerns over the country's fiscal position, according to reports from ANI citing global brokerage Jefferies. US total public debt rose 7.8% year-on-year to $40.05 trillion as of August 18. The fiscal deficit continued to widen, with the US recording a monthly deficit of $432 billion in July, the highest for that month since March 2021. For the first 10 months of fiscal year 2026, the deficit stood at $1.799 trillion, already higher than the full-year FY25 deficit of $1.775 trillion. The debt accumulation has been particularly concerning, as it has doubled in less than 10 years, highlighting the unsustainable trajectory of government finances. As per Reuters, President Donald Trump acknowledged the debt problem, stating it has been a problem for 35 years, while emphasizing that growth will solve the issue through increased economic activity.
Despite the historic debt milestone, bond markets have shown resilience with the S&P 500 ending more than 1.5% higher as technology soared on Nvidia's blockbuster earnings. According to Investing.com India, the 10-year Treasury yield climbed to its highest level since 2023 at approximately 4.7%, while the 30-year Treasury bond yield surpassed 5.3%, its highest level since 2007. However, investors appear to be demanding greater compensation for holding long-term government debt amid concerns about the growing volume of Treasury issuance needed to finance persistent fiscal deficits. The $40 trillion debt figure captures headlines, but many economists pay closer attention to the debt-to-GDP ratio at roughly 123%, which is near all-time highs. As per LPL Research, over the last 22 years, both stocks and bonds have generally risen in periods where the deficit increases year-over-year, with stocks generating positive returns 17 of those years and bonds experiencing positive returns in over half of periods.
The relationship between debt accumulation and economic growth has fundamentally shifted since the 2007-2009 financial crisis. According to Reuters, the annual federal deficit is now close to 6% of gross domestic product, significantly above the roughly 3% level economists often view as more manageable over the long term. The unusual feature is that the U.S. deficit remains close to levels normally associated with economic crises despite continued economic expansion. Tax cuts implemented during President Donald Trump's first and second terms have also contributed to larger fiscal deficits and a rising debt burden, while spending associated with an aging population has become increasingly embedded in the federal budget. The key concern is that debt is continuing to accumulate at a pace that may be difficult to offset through economic growth alone, even as the economy expands.
The debt burden is becoming increasingly expensive as interest rates appear to be structurally higher, meaning the U.S. government can no longer rely as comfortably on borrowing costs remaining below the pace of economic growth. Interest costs as a share of GDP have roughly doubled to around 3%, creating a feedback problem where higher debt leads to larger interest payments, while higher interest rates make refinancing existing debt more expensive. Treasury Secretary Scott Bessent announced on August 19 that the US Treasury would double the size of its buybacks of longer-dated securities to at least $4 billion per operation, starting September 9. However, as per LPL Research, the potential $4 billion buyback on a $40 trillion debt pile (amounting to one basis point relative to total debt) did not move the needle enough for investors to move back into long bonds. The immediate trigger for bond market turbulence was a broad sell-off in long-dated Treasuries, with 30-year Treasury yields remaining elevated at 5.23% as of August 25, and 10-year yields at 4.70%.
The sustainability of the $40 trillion debt burden depends on multiple factors beyond the current crisis. According to Reuters, the remaining roughly $32 trillion is owed to public creditors, including households, investors, foreign governments and the Federal Reserve, with publicly held federal debt now approximately equal to the country's annual economic output. While the U.S. retains an advantage because the dollar is the world's primary reserve currency, giving Washington access to a deep pool of global investors, there is no precise debt-to-GDP level at which markets suddenly determine a country has borrowed too much. The Congressional Budget Office projects a $1.9 trillion federal deficit for fiscal 2026, with the annual deficit potentially expanding to $3.1 trillion by 2036 under current law, reaching 6.7% of gross domestic product. Current estimates for the economy's sustainable, non-inflationary growth rate are generally around or below 2%, which may not be sufficient to substantially reduce the debt burden if large deficits persist. The AI investment boom is creating enormous demand for capital, with technology companies raising and spending heavily on data centres, chips and infrastructure, increasing competition with governments for available savings and potentially keeping interest rates elevated.
