High interest rates could bedevil Trump as debt rises

The 10-year Treasury yield has been rising since mid-September and is now at 4.43% as of Friday. That means that spending on the interest on the federal debt is only set to increase, adding to deficits under Trump and raising the fiscal cost of any policies that raise the deficit, such as tax cuts.

The rising yield makes budgeting more difficult and brings even greater attention to the mounting debt, currently at about $35 trillion, and deficits.

“Absolutely, the combination of soaring Social Security and Medicare costs, a very expensive Trump tax cut agenda, and rising interest rates is a recipe for soaring debt — interest rates and interest costs that could absolutely bury the budget,” Brian Riedl, a budget expert at the conservative Manhattan Institute, told the Washington Examiner.

The 10-year yield was as low as 3.62% as recently as September but has kept creeping up. It is worth noting that even minor increases in yields could cause major increases in the amount it costs to service the debt.

“Every even tenth or even hundredth of a percentage point of higher interest rates means higher interest payments that the government is making with our tax dollars and therefore not spending that money on other things,” Tara Sinclair, an economics professor at George Washington University, told the Washington Examiner.

Sinclair also served as deputy assistant secretary for macroeconomics in the Office of Economic Policy at the Department of Treasury from 2022 until this past June.

Yields on 5-year and other Treasuries have also risen alongside the 10-year. Divining what has been causing yields to rise over the past few months is challenging.

Greg McBride, chief financial analyst at Bankrate, said that one reason long-term bond yields are up is because of investor concerns about the continuing escalation of government debt — which might seem a little paradoxical, because the rising yields only make the situation worse.

“It can almost become self-propagating in the sense that the more debt the government has, the higher the tab of interest, and the more interest they have to pay, that either crowds out other government spending or it leads to more borrowing,” he told the Washington Examiner. “And it’s usually the latter.”

Sinclair said it is probably a combination of elements. For instance, expectations for the coming Trump administration coupled with evidence that the economy is further expanding and features some lingering inflationary pressures.

And while the rising cost of servicing the debt will undoubtedly pose a challenge to Trump and lawmakers, the problem is not only in the short term but also over the next decade plus.

“Currently, the [congressional Budget Office] projects that the average interest rate will be about 3.5% over the next 10 years, but the 10-year bond is already around 4.5%, which means we could very easily be looking at interest costs growing well past $2 trillion a year a decade from now,” Riedl said.

Even without the rising rates, Trump’s economic plan is already expected to drive up deficits.

An analysis by the nonpartisan Committee for a Responsible Federal Budget projected that, under its central estimate, Trump’s plan would add $7.5 trillion to the national debt, a 21% increase through 2035. The fiscal impact of Trump’s proposals ranges from $1.45 trillion on the low end to more than $15 trillion.

Trump has an ambitious plan to not only extend his 2017 tax cuts, known as the Tax Cuts and Jobs Act, but also go even further in lowering taxes. He has proposed cutting the corporate rate down to 15% and has called for ending taxes on Social Security, eliminating taxes from tips, and other carveouts that would reduce overall revenue.

“This is going to be a continuing challenge because if we look at the U.S. as compared to other advanced economies, like the G7 countries for example, we spend like we’re a big government country, but we tax like we’re a small government country,” Sinclair said.

“So if the Trump administration were to want to get the deficit under control, they probably have to be looking at some revenues or at least some entitlement reform changes,” she added.

It is possible that some deficit-minded lawmakers could balk at adding so much to the deficit at a time when the costs of servicing the country’s debt are still on the rise. There have been talks of forming a fiscal commission to examine how to address the situation, although one has still not been convened, and it is unclear how much of a priority that might be going into the new year.

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Riedl said he is pessimistic about the notion that surging deficits would compel lawmakers to try and pare back some of the Trump agenda.

“I don’t think lawmakers or voters care enough about deficits and interest rates to actually scale back their legislative plans,” he said. “They will give lip service and say, we need to cut the deficit, but at the end of the day, you won’t find many lawmakers or even voters scaling back their tax cut and spending agenda in the face of rising deficits and interest rates.”