What Happens When Debt Interest Becomes the Second-Largest Federal Expense

The federal government spent $880 billion on debt interest in fiscal 2025. That's more than it spent on Medicaid, national defense, or all non-defense discretionary programs combined. And the 30-year Treasury yield just hit 5.19%, its highest level in almost 20 years, which means those interest costs are about to get a lot worse.

According to the Committee for a Responsible Federal Budget, debt interest already eats up 19% of all federal revenue and 3.25% of GDP. If yields stay where they are right now—about 55 basis points above what the Congressional Budget Office was expecting—interest costs would jump from $880 billion to $2.5 trillion by 2036. That would push debt interest's share of federal revenue to almost 30%, nearly triple its historical average over the past 50 years.

By 2027, interest costs would overtake Medicare to become the second-largest government program, behind only Social Security. By 2036, the government would be spending nearly as much on interest as on Social Security's entire retirement program.

Treasury yields don't exist in a vacuum. When the 30-year yield sits at 5.19%, every other interest rate in the economy moves with it. Mortgages, car loans, business financing—all of it gets more expensive. A 55-basis-point increase in mortgage rates adds almost $200 per month to a $500,000 30-year mortgage, and nearly $65,000 in lifetime costs. For a million-dollar mortgage, the same rate shock adds $350 per month and nearly $130,000 over the life of the loan.

Higher borrowing costs slow economic activity, which affects corporate earnings, which affects equity valuations. If you're trading indices, this is the kind of macro shift that changes the entire context for how markets behave. The structure of global markets is shifting underneath price action, and it's not subtle.

The bond market has been climbing for weeks. Part of the pressure comes from the Strait of Hormuz closure, which rattled energy markets and stoked inflation fears (we covered that in our piece on the US-Iran conflict). About two-thirds of investors surveyed by Bank of America Research now believe the 30-year yield could break 6% within the year.

Here's the mechanical part that matters. When the average interest rate on the national debt exceeds the economic growth rate—what economists call r>g—debt can start rising rapidly and uncontrollably. Under the elevated-rate scenario, that gap would hit 75 basis points by 2036.

The combination of high debt levels and a large gap between r and g creates what CRFB calls a debt spiral. Rising interest costs boost debt, rising debt boosts interest rates, and rising rates boost interest costs further. That's a feedback loop, and once it gets going it's hard to stop even with responsible fiscal policy.

This isn't theoretical. It's happening right now in slow motion, and the bond market is pricing it in.

There's also Kevin Warsh. Trump's pick to chair the Federal Reserve is, according to University of Virginia economics professor Eric Leeper, an unknown quantity—and markets are pricing in the uncertainty. "It's not so much that people have no confidence in Warsh," Leeper told Fortune. "It's that they're not sure what they're getting."

A recent Treasury auction of 30-year T-bills at a 5% rate drew only "middling" demand, according to the Financial Times. That's a weak signal from investors who fear inflation will slowly erode their returns over the long end. When demand for long-term debt is soft, yields have to rise to attract buyers, which makes the whole problem worse.

CRFB's prescription is blunt: lawmakers need to bring interest rates down and prevent high rates from crowding out other priorities or sparking a fiscal crisis. The most effective lever is deficit reduction, which can ease near-term inflationary pressure, take downward pressure off long-term yields by reducing economic crowding-out, and shrink the debt stock on which the government pays interest.

"With debt approaching record levels," CRFB writes, "there is little time to lose."

Whether that happens is a political question, not a market one. But the market doesn't wait for policy to catch up. If you're trading indices or macro-sensitive sectors, the assumption that rates will stay elevated for longer is probably the right baseline until something changes. The mechanics are already in motion, and the feedback loop is real.