The global financial landscape is becoming increasingly rigorous regarding lending money to the U.S. government, leading to higher interest rates. These rate hikes exacerbate affordability pressures, hinder economic growth, and pose a new risk for Republicans in the upcoming midterm elections in November.
The conflict with Iran has driven energy prices up, affecting the cost of bonds that finance the Trump administration. U.S. Treasury bonds with a 10-year maturity have exceeded a 4.44% interest rate, up from 3.95% before the war began in late February. Average mortgage rates have reached their highest in nine months, while car sales are plummeting.
This challenge is worldwide, as interest rates have risen in multiple countries amidst higher inflation prospects, growing doubts about public debt sustainability, and increased investment in artificial intelligence. President Trump has reassured Americans with a plan to slash the annual budget deficit, which is around $1.8 trillion. Previously, he has highlighted tariffs, payments from foreign visas, efficiency cuts from the Department of Government Efficiency, and faster economic growth as measures.
Last week, Trump stated that the anti-fraud task force led by Vice President JD Vance would unlock massive savings. Trump claimed, “If it does incredibly well, we’ll have a balanced budget without doing anything.” Economists argue that these strategies are unlikely to significantly reduce the deficit and meet promised outcomes. Jessica Riedl from the Brookings Institution noted that servicing the national debt now costs over $1 trillion annually. She stated, “The President’s tax cut law will likely add $5 trillion to deficits over ten years, and tariffs only offset a fraction of these costs.” Budget deficits are projected to rise above $4 trillion annually within a decade due to current policies.
Deficits are expected to grow as Social Security and Medicare expenses surpass tax revenues. The Treasury rate on 10-year bonds hit 4.67% in mid-May but has moderated following ceasefire negotiations with Iran, similar to how rates initially spiked in 2025 due to Trump’s ‘Liberation Day’ tariffs before retracting their extreme increases.
Kent Smetters from Penn Wharton Budget Model broke down the increase in 30-year Treasury bond yields, estimating 60% of the rise stems from expectations of continued U.S. disproportionate borrowing and the remaining 40% linked to inflation driven by the war with Iran and Trump’s tariffs. Glenn Hubbard from Columbia University’s Business School expressed concerns, stating that the U.S. may lack the borrowing capacity it once had to counteract economic crises like the 2008 collapse or the COVID-19 pandemic.
Hubbard asserted, “I don’t think we have the margin we had in 2008 or 2020 to confront it,” adding that Washington seems devoid of solutions to address these issues. Higher interest rates present a new angle for Democratic candidates, as voters remain worried about the high costs of goods and fuel.
In Colorado’s fifth congressional district, Democrat Jessica Killin reinforces the message that persistent deficits and rising interest rates make purchasing or renovating a home, affording a new car, or managing credit card debt more challenging. Killin, an Army veteran and former senior advisor to Doug Emhoff, remarked, “Things are already expensive, and the cost of borrowing only worsens it.” Fellow Army veteran Joe Reagan, also a Democratic hopeful, emphasized fiscal responsibility in his campaign, noting, “Every dollar spent on interest is a dollar not invested in infrastructure, education, veteran services, or economic growth.” Both are challenging incumbent Republican Jeff Crank in a district their party views as a potential gain.
Killin stated, “The deficit exemplifies how Trump says one thing and does the opposite,” pointing out Trump’s March 2025 congressional address where he declared, “I want to do something not achieved for 24 years: balance the federal budget. We will balance it.” Crank, the Republican incumbent, did not respond to requests for comment.
The government plans steady reductions in budget deficits. As a proportion of the broader economy, last year’s deficit was smaller compared to 2024, albeit partly due to tariff revenues subject to reimbursement after being declared illegal by the Supreme Court. Treasury Secretary Scott Bessent highlighted last week a report indicating that up to $500 billion annually in fraudulent public spending could be eliminated, substantively lessening the deficit.
Bessent drew this conclusion from a 2024 Government Accountability Office report estimating between $233 billion and $521 billion yearly in fraudulent spending. These figures partly included the pandemic era when the government borrowed heavily to stabilize the economy. The White House and Treasury did not respond to inquiries concerning Bessent’s claims.
On deficits, Bessent expressed to reporters at the White House that the government inherited a significant burden from former President Joe Biden, a Democrat. Bessent declared, “We inherited the worst budget deficit in history—not during a recession or war,” aiming to reduce the annual deficit to 3% of the nation’s gross domestic product. Currently, it stands at about double that percentage, with no direct timeline provided for achieving this target.
Investors continue purchasing U.S. company shares, bolstering stock market values as signs of confidence in the nation’s economic potential. However, higher interest rates indicate investors view national debt as a vulnerability. Financial markets may inflict sufficient pressure through increased rates to compel political leaders to address systemic imbalances. Several economists anticipate markets will tackle the deficit issue before voters do.
Hubbard emphasized that the entire bond market system is predicated on trust for debt repayment, pointing out that the term “credit” shares its roots with “credo,” which links to belief systems. Hubbard concluded, “This is what debt is about: I believe you will pay me back. It works until it doesn’t.”
This story has been translated from English by an AP editor with the help of generative AI tools.
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