The US Treasury has sharply increased its issuance of short-term Treasury bills in July as the federal government ramps up borrowing to meet rising funding needs. According to Reuters, net Treasury bill issuance in July reached about $270 billion, surpassing Wells Fargo's full-month forecast of $256 billion. Treasury data showed net bill issuance totaled $143 billion during the first half of 2026. This strategy aims to rebuild government cash balances and finance seasonal spending requirements, with the government's efforts to rebuild its cash balance while financing seasonal spending requirements driving the increased issuance. Goldman Sachs expects total Treasury bill supply to reach about $827 billion in 2026, significantly higher than the approximately $360 billion issued in 2025. The Treasury has leaned heavily on bill issuance since Congress suspended the debt ceiling in 2023, allowing it to quickly replenish government cash reserves.
Developed economies are experiencing an unprecedented fiscal crisis with government debt across advanced economies projected to reach $75.8 trillion by end of 2026, according to Fitch Ratings. This represents a dramatic escalation from $26 trillion two decades ago, which represented approximately 68% of GDP. The credit ratings agency estimates that developed market governments will add $4.2 trillion in debt during 2026 alone, with total government debt across these economies projected to equal 104% of combined GDP. The 10 biggest developed economies are expected to account for around $69 trillion of total government debt by the end of 2026, with their debt burden forecast to reach 114.5% of GDP. As per Fitch Ratings, this debt burden represents 104% of gross domestic product for these countries, marking a sharp rise from the previous levels.
The United States is projected to record the largest government budget deficit in 2026 at 7.8% of GDP, equivalent to roughly $2.5 trillion, according to Fitch Ratings. This represents a significant escalation from the $39.5 trillion national debt milestone achieved earlier this year, which had already crossed the 100% of GDP level for the first time since World War II. The Government Accountability Office has warned that the current fiscal path remains unsustainable, with Washington now facing pressure to manage borrowing, interest costs, and budget reforms as the debt approaches the next major threshold near $40 trillion. Other major developed economies are also expected to post sizeable fiscal deficits, with France at 5.0% of GDP, United Kingdom at 4.8% of GDP, Germany at 3.7% of GDP, and Japan at 3.1% of GDP. Fitch expects the United States' debt-to-GDP ratio to continue rising from around 120% in 2026 to 131.5% by 2030, with Japan's debt ratio expected to decline modestly but remain the highest among major developed economies at nearly 192%.
The United States faces a significant fiscal challenge where interest costs have become the primary driver of deficit growth rather than traditional spending programs. The government paid $482 billion in interest on $28.4 trillion of debt in 2021 at an average effective rate of 1.70%. However, current fiscal year interest expenses are projected to reach $1.04 trillion in fiscal 2026 at approximately 3.44% - more than double the 2021 rate. This dramatic increase in interest costs is applied to a rapidly growing debt stock due to new issuance and rolling over maturing debt, with interest payments now consuming roughly 14% of federal spending and ranking among the fastest-growing parts of the budget. The Moody's Baa corporate bond yield as of last Thursday stood at 6.16% - 159 basis points above the 10-year Treasury yield of 4.57%, with corporate bond yields significantly higher than in the decade after 2012. Fitch notes that higher borrowing costs could make it more expensive for governments to finance future spending and refinance existing debt, with yields on 10-year government bonds remaining around 51 basis points higher than levels seen before the recent U.S.-Iran conflict.
Despite fiscal challenges, corporate America is experiencing unprecedented profit growth with S&P 500 operating earnings expected to reach $340.74 for 2026 as a whole, up 24% from 2025. The adjusted after-tax profits of all U.S. corporations amounted to $3.624 trillion at an annual rate in the first quarter of 2026, representing 11.4% of GDP - up 5.9 percentage points from an average of 5.5% of GDP in the decade that ended in the fourth quarter of 1994. This profit surge has been powered by falling effective tax rates, with the average effective tax rate on corporate profits falling from 28.1% in the decade that ended in the fourth quarter of 1994 to 18.1% in the first quarter of 2026. Major legislation including the 1981 Tax Act, 1986 Tax Act, 2017 Tax Act, and 2025 Act have contributed to this favorable tax environment. However, corporate interest expense as a share of sales has risen to 2.4% from 1.4% by the end of 2021, reflecting increased borrowing costs for AI investments and capital expenditures.
Beyond crisis-related spending, governments are dealing with structural financial pressures that are expected to keep borrowing elevated, including increased defence spending, ageing populations and higher pension costs, climate change adaptation investments, and rising interest payments on existing debt. Fitch estimates that European countries could increase defence spending by an average of 0.6% of GDP between 2025 and 2029. The agency also highlighted the potential impact of artificial intelligence on long-term public finances, noting that while AI could strengthen economic growth and improve debt sustainability by increasing productivity, widespread AI adoption may also lead to job displacement, resulting in higher government spending on social support while reducing tax revenues if employment levels weaken. Fitch warns that growing debt levels could increase financial market risks, with each succession of major global shocks contributing to sustained rise in sovereign debt levels. The agency notes that successive crises including the global financial crisis, eurozone debt crisis, COVID-19 pandemic, Russia's invasion of Ukraine, and ongoing conflicts have created a long-term upward trend in sovereign borrowing that has been accelerated by these events.
