It is apparent that the leaders of our country (the President, the Treasury Secretary) do not understand how debt works. That includes how debt is created, how debt is financed, how interest rates for debt are established, and how debt securities fit into the investment markets. Interest rates on longer term US Treasuries have been rising, to levels not seen in some time. Those interest rates impact the cost of borrowing for everything from US mortgages (tied to 10 yr bonds), business loans, home equity lines of credit, and some auto financing. They also impact the amount of money the government pays on the National Debt, increasing near term deficits and increasing the growth of the debt (since the government never pays down the principal and needs to issue more debt to pay the higher interest).

Let’s examine why interest on our nation’s debt is getting more expensive:

1. Inflation – increased expectations of inflation in the future results in investors requiring high interest on the debt for long-term bonds (10yr, 20yr, 30yr). If the market believes that inflation will be persistently higher for the long term, then the interest rates need to be high enough to cover those higher rates and still provide a real rate of return. So everything the government fails to do to control the rate of inflation (ie stop fighting pointless Middle Eastern wars, regulate health insurer vertical integration, tax cuts for the wealthiest with no return on investment required, antitrust actions against food processors), sustains the likelihood of higher long-term inflation that fails to achieve the Federal Reserve’s objectives of 2%.
2. Short term interest rate expectations – Long term bonds usually have rates that are higher than short term bonds. When there is a market expectation of higher Fed Funds rates (ie when the Fed may raise rates to bring down stubbornly high inflation – like now), the interest rates on longer term bonds often increase. The CPI numbers from today (3.4%) increased the likelihood of a Fed Rate increase this month.
3. Competition for Treasuries – Treasuries need to compete for investment demand in the capital market with other sovereign debt opportunities, corporate debt, and equities. Sovereign debt for other countries have seen increasing interest rates (and national debt all over the world has been increasing). In addition, foreign purchases of US debt has been declining – some of this due to alternatives and some due to purposely reducing its risk (ie. China). And then there’s AI – nearly $500B in debt has been issued to finance AI development – that’s a big new competitor for capital. And we’re only at the beginning of that trend. The more competition, the higher the rates need to be to attract investment.
4. Debt Quality – One usually imagines US debt as the safest investment out there. The credit rating agencies actually think otherwise – all of the agencies have placed the US one step below the highest credit rating since the Spring of 2025. That’s lower than Norway, Australia, Ireland, and Germany. The growing national deficits (accelerated by the current government) are ballooning the National Debt. And there appears to be no interest in the current leadership to stem the rate of increase in our debt. The President has proposed a half-a-trillion dollar annual increase in Defense Department spending – that’s another $5 Trillion in National Debt over the next decade. Just this week he proposed a $5000 per adult ‘dividend’ – costing $1.3 Trillion dollars – financed by debt (unlike corporate dividends that are financed by free cash flow). The attitude that the US can spend money like a drunken sailor gives the capital markets less confidence that the US will always pay its obligations. And each government closure is a new chink in the financial reliability armor of the US government.

This Administration and its sycophantic Congress have done little to nothing to create the conditions for lower interest rates and lower inflation. Instead of planning to control the National Debt, they’ve made plans to grow it. They’ve pumped up the AI wagon with no regulatory backstop to control the economic costs of its development. They continue to alienate our allies who have spent decades investing in our country and our debt – that alienation can have economic consequences should they choose to pull the foreign debt purchasing rug out from under us. The Treasury Secretary, Scott Bessent, has begun to increase the US bond buyback program (additional $4B this month), but in a $50 Trillion US bond market and a $160 Trillion international bond market this is merely a drop in the ocean. The capital markets told the tale – long bond yields rose after the repurchase. Bessent declared “I am the house now” – perhaps he meant the house of cards.

And the national disgrace continues…