US Treasury yields climb above 5%, but fiscal crisis remains unlikely

The benchmark 10-year Treasury yield has moved above 5%, pushing the federal government's net interest costs to an estimated $1.05 trillion for the first 11 months of fiscal year 2026. Policy experts warn that higher borrowing costs could create a feedback loop in which rising interest expenses force additional borrowing, potentially leading to a debt spiral.

"The real threat is the debt spiral. If interest begets debt, and debt begets interest, eventually debt will spin out of control. A fiscal crisis, once unthinkable, is now a distinct possibility," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

Bond market strategists at TD Securities, however, argue that the United States is not near a fiscal breaking point. They note that the weighted-average maturity of Treasury debt is about 5.9 years, meaning the higher rates will be absorbed gradually as existing bonds mature. The average coupon on Treasury securities, excluding bills, remains around 3.1%, and the overall interest rate on the debt portfolio is about 3.4%, still below the current nominal GDP growth rate of 8.5%.

"There are valid concerns that the U.S., along with many other developed economies, will suffer from the negative feedback loop caused by higher yield costs increasing their fiscal burden as they refinance their debt and fund their fiscal deficit. However, the US still retains much of the 'exorbitant privilege' of the US dollar and its role as the most liquid and still highly rated economy. Therefore, we are some way away from a fiscal crisis," said Matthew Reese, head of global bond strategies at L&G Asset Management.

TD Securities projects interest expenses could rise to $1.4 trillion in fiscal 2027 and $1.6 trillion by 2029 if yields stay near current levels, but emphasizes that the debt does not need to be refinanced all at once. Other factors contributing to the yield surge include expectations of further Federal Reserve rate hikes, stronger economic growth, higher oil prices, corporate bond issuance, and repositioning by fast-money investors.

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, highlighted the resilience of the economy as a key driver, noting that recent jobs data support a robust labor market despite elevated borrowing costs. He added that a sustained rise in yields would likely require clear evidence of economic or financial market stress.

Overall, while the rising cost of borrowing raises concerns, analysts say the United States' fiscal position remains manageable for the time being.