The United States federal debt has surpassed US$ 40 trillion in size, and the market focus is not only on the total in itself, but also on how high Washington will continue to finance in the future. As the fiscal deficit widens and long-term interest rates remain high, the United States debt burden is being further channelled to bond markets.
The deficit continued to widen in July
According to United States Treasury data, the July budget deficit was $432.0 billion, the largest single-month gap since March 2021. It has also brought the cumulative deficit 10 months ago to $1.799 trillion, which is already above the level of $1,775 trillion for the entire fiscal year 2025.
This means that federal government expenditure remains significantly higher than income and the need for new financing continues to rise. For the market, the size of the debt overwhelms the integers is only a sign, and more direct pressure arises from the effect of continued debt on interest rates.
Increased interest expenditure
Another layer of pressure on debt comes from the cost of refinancing. Once the United States Treasury debt, which had previously been issued at lower interest rates, had matured, it would need to be reissued in a higher rate of return, which would directly increase fiscal interest expenditure.
The Budget Office of the United States Congress projects that the United States net interest expenditure will exceed $1 trillion in fiscal year 2026, or about 3.3 per cent of GDP. If the current policy is largely continued, the figure may rise to $2.1 trillion by 2036.
Higher interest expenditure will further widen the deficit, which in turn will require more borrowing, resulting in a spiral between fiscal and financing costs.
Long-term United States debt returns are high
Bond investors have demanded higher returns to hold long-term United States Treasury debt. The annual United States debt return rate has recently risen to 5.34 per cent, the highest since 2007, reflecting market concerns about inflation, the size of government borrowing and fiscal prospects.
To ease the pressure on long-term interest rates, the United States Treasury has increased the scale of some 10 to 30-year-old bond buy-backs this week from $2 billion to at least $4 billion per buy-back. The long-term rate of return declined after the news was released, but the buy-back remained limited compared to the large United States Treasury debt market.
At the same time, the United States Government is competing with businesses for funds. Some companies are financing AI infrastructure through debt, which also increases bond supply and may continue to put pressure on long-term borrowing costs.
According to the budget office of the United States Congress, the size of United States Treasury debt held by the public will rise to 120 per cent in 2026, equivalent to about 101 per cent of GDP. The market is now more concerned about whether future financing costs in the United States will rise further as debt continues to expand.