Why Rising Government Debt Has Investors Watching Long-Term Rates

In July, the bond market hit a new high—and I’m not referring to prices, returns or yields. I’m talking about the amount of outstanding U.S. government debt. According to the U.S. Treasury, the amount of federal debt surpassed $35 trillion last month, which works out to over $100,000 per citizen when assuming an estimated population of 342 million.

The continued growth in the budget deficit and subsequent increase in the amount of federal debt has major implications for investors, if the recent volatility hasn’t added enough fuel to the fire. An increasing amount of debt could lead to higher interest rates and higher inflation, if not addressed.

Such a large number must be put into context. The best way to do so is to compare the amount of debt and the service on that debt as percentages of GDP.

When looking at data from the U.S. Treasury, the current total federal debt-to-nominal GDP ratio stands at 122% and is expected to grow. The amount of debt is currently increasing at roughly 7.7% per year, while nominal GDP is growing at 5.4% over the same period. Remember, nominal GDP includes both real GDP growth and inflation. Given those growth-rate assumptions, the debt-to-GDP ratio will most likely move above 140% in 2027 and above 150% in 2030. These are conservative estimates—the analysis does not include any additional debt that may be incurred by future administrations.

The Congressional Budget Office estimates that the total amount of gross federal debt will reach $52 trillion by 2033, a 48.5% increase from today’s level. Similarly, the office’s estimates assume there are no changes in current laws governing taxes and spending.

The U.S. recently passed $1 trillion in quarterly interest payments, as highlighted in a recent Forbes article. The move higher in annual payments on debt translates to 2.41% of GDP at the end of 2023, an increase from 1.22% at the end of 2015. The CBO has projected the net interest payments as a percent of GDP to reach 3.6% by 2033, which also excludes any new policy spending. To put that into perspective, the U.S. currently spends 3.4% of GDP on defense.