The US debt spiral risk appears to be receding as 8.5% growth outpaces the 3.4% average rate on federal debt, despite 5% yields on 10-year Treasuries. According to the Bureau of Economic Analysis, this annualized second-quarter pace provides a cushion against the rising interest burden. However, the 3.4% average partly reflects older bonds, and TD Securities notes that higher costs feed through as bonds mature. The company estimates fiscal 2026 interest costs at about $1.1 trillion, with projections of $1.4 trillion in 2027 and $1.6 trillion in 2029 if yields hold. Recent data shows the US government's annual interest bill has climbed to about $1 trillion, with total federal debt exceeding $40 trillion. About one in every five dollars of tax revenue now goes to servicing the national debt, underscoring the growing fiscal burden.
Scope Ratings maintained the US credit rating at AA- with a stable outlook on Friday, keeping the country three steps below the maximum rating. According to reports from NDTV, the rating agency warned that America's exceptionally large budget deficits and inexorably rising debt risks are making the country increasingly vulnerable to fickle investors. The company emphasized that the country's path of piling on borrowings can't last forever. TD Securities strategists note that "a fiscal apocalypse is not upon us just yet" despite the challenging debt dynamics. However, Scope last lowered America during the 2025 debt ceiling impasse and scores the country two steps below Moody's, Fitch and S&P Global Ratings, making it one of only five companies used by the European Central Bank to assess collateral.
Scope Ratings predicts that debt as a percentage of output will rise to 160% within a decade, highlighting the unsustainable nature of current fiscal policies. As reported by NDTV, the company stated that absent materially stronger economic growth or substantial fiscal adjustment through either higher revenues or spending reductions, debt dynamics will remain unfavorable. This trajectory points to an unsustainable medium-term fiscal path and leaves the sovereign increasingly exposed to shifts in market sentiment. The Congressional Budget Office projects public debt at about 101% of gross domestic product (GDP) in fiscal 2026. The current situation could more closely resemble the postwar experience if Washington avoids significant spending cuts or tax increases, as mandatory spending now accounts for a larger share of the federal budget than in the 1990s.
The current cushion appears to depend on growth momentum, with TD Securities linking the yield surge partly to a stronger economy, expected Federal Reserve rate hikes and higher oil prices. TD Securities puts the debt's weighted-average maturity at about 5.9 years, with bonds excluding short-term bills carrying an average coupon of 3.1%. BMO's survey ranks housing as the likeliest first casualty of higher inflation-adjusted rates at 42%, ahead of stocks at 26%. Washington has several options to manage borrowing costs, including increasing its reliance on short-term Treasury bills and buying back older debt. However, more aggressive measures could eventually require the Federal Reserve to intervene, creating risks that efforts to suppress yields could fuel inflation. Operation Twist could be an early option, though large-scale purchases would blur the distinction between monetary policy and government debt management.
While the US no longer has a top credit score from a major assessor following a cut last year by Moody's Ratings, Scope's view has long stood out as particularly downbeat. The government is issuing large amounts of debt to finance persistent fiscal deficits, while inflation has been slow to return to the Federal Reserve's target. An artificial intelligence investment boom is keeping economic growth relatively resilient, limiting the scope for interest rates to fall even as parts of the economy weaken. Economists argue that fiscal discipline, spending restraint and stronger revenues offer the more sustainable solution to the debt problem, rather than relying solely on the Federal Reserve. The 1990s experience showed that spending restraint and stronger government revenues played a larger role in reducing the debt burden, with the debt-to-GDP ratio declining from about 48% to 32% during that period.
