Government bond yields recently spiked to their highest level since 2007, just as the gross U.S. national debt passed the symbolic milestone of $40 trillion. Treasury Secretary Scott Bessent moved quickly to project a sense that the Trump administration had a plan to contain long-term borrowing costs. But at best, these moves will merely delay the inevitable challenges of financing the administration’s unsustainable tax and spending policies.
There are several reasons for the recent yield spike. Bond yields are driven by supply and demand: as more entities seek to borrow more money, they must offer higher interest rates to attract investors. Since the day Trump began his second term, the federal government has spent $3.8 trillion more than it raised in revenue, all of which had to be financed with borrowing. Foreign governments with fiscal imbalances of their own are also competing for this capital, as is the private sector, particularly tech companies seeking to finance a rapid build-out of infrastructure for artificial intelligence.
These higher borrowing costs are coming at a time when the federal government was already projected to spend nearly $1 trillion just paying interest on the national debt this year — almost $3,000 per American citizen. Higher yields also increase mortgage interest rates and other consumer borrowing costs at a time when cost-of-living concerns are at the top of voters’ concerns.
Bessent attempted to tame these costs by pledging to increase government repurchases of bonds. By reducing the total outstanding supply of government debt, the Treasury would reduce the yield it needs to pay to get enough investors to buy new debt at auctions. Bessent suggested he would finance the repurchases through two mechanisms: spending down the government’s cash on hand, and issuing shorter-term debt that generally comes with a lower interest rate than 10-year bonds.
Bessent’s moves may reduce interest costs in the short term, but they are no substitute for the underlying problem of unsustainable deficits. Eventually new bonds will need to be issued to cover new obligations and replace the bonds repurchased by the Treasury.
