Key takeaways
The growing U.S. national debt is drawing increased attention.
The estimated national debt in early 2024 stands at more than $34 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.
The combination of rising federal debt, combined with higher interest rates, raises concerns about the potential long-term impacts to the U.S. economy. Debt has risen steadily in recent years, and as of April 2024, the national debt stands at $34.59 trillion.1 The nation’s debt has essentially doubled in just 15 years.
Government debt is financed by issuance of U.S. Treasury bills, notes and bonds. Treasury has been required to issue increasing amounts of debt in recent times. The recent upturn in interest rates means the cost of financing government debt has become more expensive. According to the U.S. Treasury, the average interest rate for all federal government issued interest bearing debt has jumped dramatically in recent years, to 3.22% as of March 31, 2024.2
“The U.S. government is now paying more interest, requiring further debt issuance,” says Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “The proportion of the federal budget required to maintain the national debt has grown significantly.” The combination of rising debt and the increased interest expense associated with financing the national debt raises questions not just about the impact on the federal government’s budget, but on the economic impact, potential tax ramifications and the implications for investors.
Three of the primary drivers of interest rates are the Federal Reserve’s (Fed’s) policy rate, economic growth and inflation. Beginning in 2021, inflation began climbing quickly, and interest rates followed soon after. The Fed also responded to the resurgence of inflation by raising its target federal funds rate by over 5% from near zero over the course of between March 2022 and July 2023. As shown here, the yield on the benchmark 10-year Treasury note has, in recent months, traded at its highest levels since 2007.
“Initially, higher bond yields reflected rising inflation,” says Bill Merz, head of capital market research at U.S. Bank Wealth Management. “Now, even as inflation decelerated, the U.S. economy demonstrated surprising strength, which also likely had an impact on investors’ expectations for interest rates.” Both faster growth as well uncertainty over the timing of a Fed shift in monetary policy, including interest rate cuts, contribute to elevated bond yields, according to Merz.
Other considerations come into play as well. “One key factor is the supply of bonds relative to the demand by bond buyers.” If the Treasury needs to issue more bonds, that results in greater supply. “In that event,” says Merz, “more supply might result in buyers demanding higher interest rates to absorb the expanded issuance.”
Treasury bond issuance has increased to cover rising debt levels. The U.S. Treasury borrowed $776 billion in the fourth quarter of 2023 with plans to borrow another $750 billion in the first quarter of 2024.3 Just as Treasury debt supply expands, the pool of Treasury securities buyers has been reduced. “The most important buyer to leave the market is the Fed,” says Haworth. As part of its effort to slow economic growth and temper inflation, the Fed ended its bond-buying program in 2022 and began allowing their existing Treasury holdings to slowly mature. “However, the Fed may consider ending this strategy, and could decide to again become a buyer of new debt at some point in the near future,” says Haworth.
In addition, interest in U.S. Treasuries has subsided among foreign buyers, most notably the Chinese government. “One advantage of this trend is that debt becomes more sustainable if we are financing it domestically, rather than relying on foreign buyers,” says Haworth.
Merz notes that long-term fiscal viability and credit issues can, in certain circumstances, become factors that influence bond yields. “If investors become concerned with the U.S. Treasury’s ability to make good on its debt and avoid default, that could have an impact on interest rates,” says Merz. Credit agencies such as Fitch, Standard & Poor’s and Moody’s have either downgraded credit quality of U.S. Treasury issues or issued warnings about potential future downgrades.
“The question long-term investors ask is whether the country’s debts can ultimately be paid,” says Haworth. “Despite the lack of a policy consensus in Washington, there remains an expectation for now that Congress will find ways to cut spending and raise taxes to help resolve debt issues.”
“If investors become concerned with the U.S. Treasury’s ability to make good on its debt and avoid default, that could have an impact on interest rates,” says Bill Merz, head of capital markets research at U.S. Bank Wealth Management.
The issues created by the national debt don’t appear to be immediate. “The government’s debt is manageable today,” says Merz, “but its 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.
A combination of growing expenditures and tax revenues that can’t keep pace will result in larger projected yearly deficits for the foreseeable future. As a result, continued growth in the total national debt is projected.
To help put debt totals in perspective, analysts frequently compare the total national debt to the nation’s gross domestic product (GDP), which measures the size of the economy. In 2023, for example, the nation’s total publicly held debt amounted to 97% of the full value of the economy as measured by GDP. By 2054, the debt-to-GDP ratio will, according to most recent projections from the Congressional Budget Office, exceed 172% (meaning debt will be close to double the nation’s economy).4
While these numbers appear unfavorable, it isn’t clear when debt becomes unsustainable or has a negative impact on economic growth. Such residual effects are possible because increased taxes, lower federal government spending or both, aimed at lowering the debt, could be detrimental to the economy. “Many developed countries, such as Japan, have faced high debt-to-GDP levels, and still found ways to grow their economy,” says Merz.
Haworth points out that much of the nation’s long-term debt problem centers on growing deficits 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 they are not yet on voters’ radar, so Congress hasn’t yet seriously considered solutions to them.”
While growing government debt draws increasing attention, an important question for investors is what the potential impact is on the long-term interest rate environment. What could it mean for fixed income and equity portfolios?
“The Fed and other global central banks maintained unusually low interest rates dating back to the financial crisis in 2008 until recently,” says Haworth. “What we may see now are more normalized rates."
Merz believes the U.S. position relative to the global economy remains strong, which allows the federal government more time to address the debt situation before it results in significant economic ramifications.
Haworth says for equity investors, one key question is whether higher interest rates potentially slow corporate borrowing activity. “Capital intensive projects require a payback that justifies higher borrowing costs,” says Haworth. “That has the potential to slow corporate borrowing activity and may prove detrimental to business activity and economic growth.” However, Haworth notes that many other factors could have a bigger impact on the long-term investment landscape.
For investors, the size of the national debt doesn’t present immediate challenges. U.S. Bank continues to see opportunities in high quality bonds, including U.S. Treasury obligations. Investors benefit from the highest yields in years, which translates to steady, reliable portfolio income. Treasuries, along with other investment grade bonds, also possess important diversification properties that can improve portfolios’ long run returns relative to risk. We continue to 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 3.22% as of March 31, 2024. That’s more than 1% higher than where the average rate stood at the end of 2022.2
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 February 2024, that debt equaled more than $34 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.
Congress finally passed the remaining appropriations bills necessary to finalize the federal budget for the remainder of fiscal year 2024, which runs through the end of September.
Explore how capital markets have fared so far under the Biden administration and learn what to expect in the runup to this year’s presidential election.
Equal Housing Lender. Deposit products are offered by U.S. Bank National Association. Member FDIC. Mortgage, Home Equity and Credit products are offered by U.S. Bank National Association. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice.
