The US economy faces rising concerns over a debt spiral as 10-year Treasury yields recently reached a 24-year high, surpassing 5%. Despite this, the current annualized growth rate of 8.5% in the second quarter remains higher than the 3.4% average interest rate on existing government debt.
Analysts at TD Securities note that the 3.4% average interest rate is partially supported by older bonds. As these instruments mature, higher costs will likely take effect. The weighted-average maturity of US debt is currently estimated at approximately 5.9 years, with bonds excluding short-term bills maintaining an average coupon of 3.1%.
Projections from TD Securities suggest that fiscal interest costs could reach $1.1 trillion in 2026, rising to $1.4 trillion in 2027 and $1.6 trillion by 2029 if current yields persist. Additionally, the Congressional Budget Office estimates that public debt will reach 101% of GDP by fiscal 2026.
Economic data for the second quarter shows that consumer spending contributed 2.5 percentage points to real GDP growth, while imports reduced it by 1.6 points. Experts from BMO Capital Markets and L&G Asset Management suggest that the sustainability of this debt depends heavily on maintaining nominal economic growth.
Market sentiment regarding the impact of high interest rates varies. A BMO survey indicates that 42% of respondents view the housing market as the most vulnerable sector, followed by stocks at 26% and the labor market at 1%. Meanwhile, the Hang Seng Index in Hong Kong declined by 3% following the rise in US yields.
