Key takeaways
The growing U.S. national debt is drawing increased attention.
The estimated national debt stands at nearly $36 trillion, a record amount that has doubled over the past 15 years.
A major concern is not just about the growing level of debt, but how today’s higher interest rate environment affects debt repayment.
Growing federal government debt was an issue mostly overlooked in 2024’s presidential campaign. While candidates focused on ways to cut taxes or expand existing government programs, there was limited discussion concerning the fact that the federal government’s debt is closing in on $36 trillion (as of late November 2024),1 and still rising.
While politicians may not be paying attention to the national debt, capital markets are.
Higher interest rates exacerbate the debt problem as it makes the cost of servicing that debt more expensive. Government debt is financed through issuance of U.S. Treasury bills, notes and bonds. Higher interest rates mean the U.S. Department of the Treasury must offer higher interest rates on newly-issued debt. The average interest rate for all federal government-issued interest-bearing debt has jumped in recent years, to 3.30% as of October 31, 2024.2 That’s more than double the average interest rate paid in 2020.
In anticipation of pending Federal Reserve (Fed) interest rate cuts from recent high levels (the upper level on the federal funds target rate stood at 5.5% for more than a year), yields across the bond market declined in early 2024. However, once the Fed implemented its initial rate cut, 10-year Treasury bond yields trended higher. Between mid-September and mid-November, 10-year Treasury yields rose from 3.63% to 4.44%.3 “Part of what we’re seeing with the recent upturn in long-term bond yields is tied to deficit concerns,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The U.S. government is now paying more in interest, requiring further debt issuance.”
Rising interest rates exacerbate the federal government’s budget challenges. “The proportion of the federal budget required to maintain the national debt has grown significantly,” notes Haworth. The question for investors, however, is the extent to which Treasury debt issuance can potentially impact fixed income and equity markets. “Higher bond yields may lead investors to put more money into fixed income instruments rather than into stocks,” says Haworth. That could have negative stock market ramifications. “Yet for now, it’s not a problem until the bond market deems it a problem.” Haworth says he’ll be watching to see how investor demand for increased Treasury issuance, including foreign buyer interest, holds up, and whether large bond traders begin selling their positions.
The U.S. Treasury borrowed (by issuing new Treasury debt securities) $748 billion in the first quarter of 2024, $234 billion in the second quarter and $762 billion in the third. It expects to borrow an additional $546 billion in the fourth quarter, but the amount of first quarter 2025 borrowing is expected to balloon to $823 billion.4
While Treasury debt expands, there are concerns over the shifting pool of Treasury buyers. Most notably the Fed is winding down its balance sheet of bond holdings by redeeming a portion of its Treasury securities rather than purchasing Treasuries, as it did prior to 2022. The role of foreign buyers is diminished as well. Growing trade tensions may be a factor. “China is less likely to expand its Treasury holdings if it doesn’t have as many dollars to invest based on reduced U.S. trade,” says Haworth. “In the meantime, Japan is focused on internally funding its own debt.” As a result, individual investors, either through direct purchases or via mutual funds, have taken on a much larger role as Treasury debt purchasers.
The issues created by the national debt don’t appear to be immediate. “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 is the issue that concerns some investors.” A key question, according to Merz, is how quickly the government addresses the challenge. He says the sooner the long-term debt problem is addressed, the less painful it will be to resolve.
“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 is the issue that concerns some investors.”
For perspective, analysts frequently compare total national debt to the nation’s gross domestic product (GDP), which measures the size of the economy. In late 2024, for example, the nation’s total publicly held debt amounted to 123% of the full value of the economy as measured by GDP.5 This number is expected to continue to climb. While the absolute debt-to-GDP ratio may be manageable, more concerning is this measure’s dramatic trend upward.
Immediate steps to cut the government’s deficit spending habit aren’t clear, as the new administration and a new Congress take office in 2025. “We still don’t know much about specific policies and the deficit implications,” says Haworth.
In order 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.” This is due to increased taxes, lower federal government spending, or both, aimed at lowering the debt, which could take a toll on the economy.
Haworth also points out that much of the nation’s long-term debt problem centers on funding commitments for 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 seriously considered solutions to them.”
There are reasons to be concerned that a larger supply of bonds might put upward pressure on interest rates, though that doesn’t yet seem to be a significant concern. 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.
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. However, Treasury securities and other fixed income investments should continue to play an important role in a broadly-diversified portfolio. U.S. Bank will closely monitor the government’s increasing debt burden and policies that influence long-run sustainability for signs of change in the broader investment landscape. Consider talking with your financial professional to make sure you have a comfort level with your current plan and investment position.
The rate on debt issued by the U.S. Treasury varies constantly. Therefore, the rate paid on debt issued on specific dates will differ from day-to-day. In terms of the accumulated Treasury debt securities outstanding on the open market, the average interest rate paid by the government was 3.30% as of October 31, 2024. That’s more than double the average interest rate applied to U.S. government debt in 2020.2
Government debt, funded by U.S. Treasury debt securities, is funded by a variety of buyers. The largest group of buyers are foreign entities (governments, institutions and individuals) who own close to 30% of the debt. The Federal Reserve Bank is also a major buyer, but since 2022, the Fed has reduced its Treasury debt holdings. Individuals and mutual funds are taking on a more important role as buyers of U.S. debt. (Source: U.S. Bank Asst Management Group analysis.)
Debt represents a shortfall of revenue to meet all current expenses. In November 2024, that debt totaled nearly $36 trillion.1 The U.S. federal debt represents accumulated federal government deficits over a period of years. In most years, Congress, when it approves spending measures, is not required to balance the budget. Without sufficient tax revenue and fees to meet approved expenses, a deficit results, adding to the federal debt.
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