High interest rates could balloon the national debt

The bond market is sending a clear signal about the long-term cost of U.S. fiscal policy, and the math is sobering. If interest rates stay just one percentage point higher than the Congressional Budget Office expects, the federal government’s interest payments would balloon by roughly $1.5 trillion over the next decade alone, pushing debt held by the public to 222% of GDP by 2056. That was the dominant economic story in this episode of Marketplace, but it shared space with a mixed bag of other developments: a U.S.-China summit that produced more pageantry than policy, deep staff cuts at a key federal conservation agency, and a new scorecard grading private equity firms on their climate risk.

The bond market’s warning on debt

The episode’s central piece examined why yields on U.S. Treasuries have climbed to around 5% — levels not seen in 20 years. Greg Ip of the Wall Street Journal pointed to two main drivers. First, large and persistent federal deficits are making investors nervous, and this is a global phenomenon, not just a U.S. one: investors in Japan and France are demanding higher rates too. Second, rising oil prices are feeding inflation expectations, which in turn raises the odds that the Federal Reserve will hike short-term rates again. Markets were pricing in nearly 70% odds of another rate hike in late October.