The impact of U.S. national debt on your investments

With new policy initiatives under consideration by the Trump administration, federal debt has taken on greater visibility. The national debt totals $38.7 trillion, and federal debt has doubled in size over the past 15 years. ¹ Policymakers and outside observers frequently warn that rising debt can create challenges, even when markets do not react right away.

Markets remain steady amid rising national debt concerns

Up to now, the surging national debt has not notably dragged down economic growth or capital market performance. Investors have continued to focus on how fast the economy is growing and where interest rates may settle. The key shift is that higher interest rates make the national debt more expensive to carry than it was during the low-rate years.

“Markets are aware of the issue, but are not pricing in disruptions,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Bond markets are where investor concern over rising debt will be most visible.” Yields on the 10-year U.S. Treasury note are hovering near 4.1%, which Haworth says reflects  little market concern about continued debt growth.

Higher rates make the debt more costly to maintain

The government’s accumulated debt matters more when the cost of borrowing rises. Interest rates jumped significantly beginning in 2022, and that shift has made interest costs a larger component of federal government spending. The average interest rate for all federal government-issued interest-bearing debt has climbed to 3.35% as of January 31, 2026, more than double the average interest rate paid in 2020. ²

Policy choices can also push interest rates in different directions at the same time, which can create short bursts of market volatility. At its January 2026 meeting, the Federal Open Market Committee kept the federal funds target rate in a range of 3.50 to 3.75%. Median Fed member projections anticipate one 0.25% cut in 2026, while investors expect two or three additional cuts, and that gap can create near-term volatility in bond prices. ^{3, 4}

“Federal Reserve (Fed) rate cuts pulled short-term bond yields lower,” notes Bill Merz, head of capital markets research for U.S. Bank Asset Management Group. “Longer-term bond yields remained rangebound in recent months due to lower future inflation and policy rate expectations offsetting stronger economic growth expectations.” Investors can watch those same forces—policy now, and growth and inflation expectations over time—to make sense of why short-term and long-term rates can move differently.

Treasury borrowing remains large, and demand matters

The Treasury plans to borrow substantial amounts in the near term, which keeps the debt conversation in focus for investors. In 2026’s first quarter, the Treasury anticipates borrowing $574 billion by issuing new privately held, net marketable Treasury debt securities. In the second quarter, the Treasury projects borrowing another $109 billion, and in 2025’s closing three months the Treasury borrowed $550 billion. ⁵

Large borrowing totals do not automatically cause market stress, but they do raise an important question: who will buy the new supply. The Fed stopped shrinking its bond holdings in December, and those holdings stand near $6.2 trillion after peaking at $8.5 trillion in 2022. Through November 2025, the Fed allowed some bonds to mature without replacement each month. It has now begun buying short-term Treasury bills to help ensure ample banking system reserves and keep short-term interest rates near its intended policy rate.

Foreign demand remained steady in 2025 (compared to 2024 levels), even as trade tension has increased and China has played a smaller role. Individual investors—either through direct purchases or through mutual funds—have taken on a larger role as Treasury buyers. A broader buyer base can help markets absorb heavy issuance, while a pullback in demand can push interest rates higher to attract additional buyers.

Why debt can influence both stocks and bonds

A key investor concern is whether heavy Treasury issuance can affect both bond and stock markets. “Higher bond yields, if they occur, could lead investors to put more money into fixed income instruments rather than into stocks,” says Rob Haworth. That shift can pressure stock market valuations when bonds offer more attractive income, even if the economy continues to grow.

“Yet for now, government debt is not a problem until the bond market deems it a problem,” Haworth concludes. This captures why investors often treat debt as a slow-building force rather than an immediate trigger. Markets can tolerate high debt for long periods, but they can also reprice quickly if inflation expectations rise, growth weakens, or investors demand higher compensation for risk.

How risky is rising government debt?

The national debt does not appear to pose an immediate risk.  “The government’s debt is manageable today,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management. “But the ability to sustain rising debt levels over time concerns investors.” Merz adds that acting sooner on long-term solutions can reduce the pain of adjustments later.

Investors often compare government debt to the size of the economy because that comparison helps frame sustainability. In late 2025, publicly held debt amounted to approximately 101% of the economy as measured by gross domestic product (GDP). The Congressional Budget Office’s February 2026 projections show debt held by the public rising from 101% of GDP in 2026 to 120% in 2036, and 175% in 2056, after factoring in revenue impacts from new tariff rates as well as tax cuts enacted in the One Big Beautiful Bill Act. ⁶

Deficit spending as a percent of GDP represents another metric investors focus on, and correlates to the amount of debt the U.S. Treasury must issue, typically in the form of Treasury bills, notes, and bonds. Deficit spending as a percent of GDP recently stabilized in the 5-6% range, with the Congressional Budget Office projecting a continuation near these levels.

To reduce the debt, Haworth points out that the government must first eliminate deficit spending on an annual basis. “Next, you need to pay down debt, and that too will take money out of the private sector.” Higher taxes, lower government spending, or both can slow economic activity because they reduce the amount of money flowing through households and businesses.

Haworth also highlights that much of the long-term challenge centers on Social Security and Medicare. “We have an aging population and fewer workers in succeeding generations to pay the costs of these programs,” says Haworth. “These are manageable budget matters, but Congress hasn’t yet formulated solutions to them.”

What this can mean for investors right now

Debt trends can create reasons for concern, but the near-term market impact often depends on how interest rates respond. A larger supply of bonds and reduced participation by some buyers can put upward pressure on interest rates, though this has not yet become a dominant market concern. The practical takeaway is that interest rates often matter most at the margin, shaping how investors weigh the appeal of bonds versus stocks.

Haworth says interest rates matter for equity investors because higher rates make bonds more competitive with stocks. “Once interest rates stabilized in mid-2023, stock valuations moved higher, reflecting both higher earnings and expectations that rates will trend lower,” says Haworth. That history shows how quickly the market narrative can shift when investors believe rates have peaked or stabilized.

Investors may wish to consider overweight positions in equities to capitalize on continued economic growth. Fixed income holdings may be positioned with a modestly less-than-neutral weighting, yet Treasury securities and other bonds can still play an important role in a broadly diversified portfolio. U.S. Bank will monitor the government’s increasing debt burden and policies that influence long-run sustainability for signs of change in the broader investment landscape.

Talk with your financial professional to confirm that your plan and investment mix align with your goals and comfort level. Debt discussions can create loud headlines, but long-term results typically come from diversification and disciplined decision-making. A clear plan can help investors stay focused when markets remain calm but uncertainty rises.

FAQs

What is the interest rate on the national debt?

The U.S. Treasury pays different interest rates across many types of debt, and those rates move as new debt is issued and older debt matures. To understand the overall cost, investors often look at the average interest rate across interest‑bearing federal debt, which reached 3.35% as of January 31, 2026. ² That average sits far above the low‑rate period earlier in the decade, which is why interest costs now take up a larger share of government spending than they did when rates were lower. ²

Who owns the U.S. national debt?

A wide range of buyers fund the national debt by purchasing U.S. Treasury securities, including foreign investors, U.S. individuals, mutual funds, and the Federal Reserve. Foreign entities—governments, institutions, and individuals—represent one of the largest groups cited here, holding 25% of the debt, based on 2025 U.S. Department of the Treasury data. The Federal Reserve remains a major holder even after reducing its Treasury holdings from earlier peaks, and individuals and mutual funds have taken on a larger role as buyers in recent years.

Why does the U.S. have so much debt?

The debt grows when government revenue falls short of government expenses, creating annual deficits that the Treasury finances by issuing bonds and other securities. Over time, those yearly deficits add up, which is why the debt reflects many years of budget outcomes rather than a single decision. For example, the debt totaled $38.6 trillion in February 2026, illustrating how quickly the total can rise when deficits persist and interest costs climb in a higher‑rate environment.