Rising Treasury yields challenge CBO forecasts and prompt debt-concern among former skeptics
Higher Treasury yields are pushing interest costs on the U.S. debt beyond the Congressional Budget Office's projections, leading some analysts who previously downplayed fiscal risks to warn of a possible debt crisis.
The Congressional Budget Office’s latest long-term outlook, released in February before the Iran conflict raised oil prices, projected the benchmark Treasury yield at about 4.1% for this year and 4.2% in 2027, with the 10-year yield near 4.3% through 2031 and modestly higher thereafter. Since then, the 10-year yield has risen more than a percentage point, reaching levels that exceed the CBO’s baseline assumptions.
Higher yields increase the Treasury’s interest outlays, which the Committee for a Responsible Federal Budget estimates could reach $2.7 trillion annually by the end of the decade if yields stay roughly 80 basis points above the CBO’s baseline. The rise reflects a combination of factors, including a hotter economy, a tight labor market, a growing $40 trillion debt stock, persistent $2 trillion annual deficits, competition for bond investors from other indebted nations and large technology firms, and heightened geopolitical risk.
"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.
Market veteran Ed Yardeni, who previously described 4%-5% yields as normal for a strong economy, now cautions that the 10-year Treasury yield could break above 5.00%, noting, "We will worry about a debt crisis when the bond market worries about a debt crisis."
Former Council of Economic Advisers chair Jared Bernstein, who had long resisted alarmist language on the debt, wrote that rising rates, large deficits and a lack of bipartisan action are bringing the fiscal situation closer to a crisis, adding, "Even though I can’t tell you the day and time when the fire will ignite, I can tell you that we’re getting closer."
Analysts suggest that unless inflationary pressures ease, energy costs fall, or significant fiscal reforms are enacted, Treasury yields may remain elevated, further increasing the cost of servicing the national debt.