Strong Growth Buys Time for US Debt Despite High Yields

With 10-year Treasury yields exceeding 5% and annual interest payments surpassing $1 trillion, the prospect of a US debt spiral appears nearer. However, pre-inflation growth of 8.5% continues to exceed the 3.4% average interest rate on the debt.

The Bureau of Economic Analysis recorded that 8.5% as an annualized rate for the second quarter. But the 3.4% average is influenced by older bonds, and TD Securities warns that costs rise as those bonds mature and are refinanced.

Why Haven’t 5% Yields Triggered a US Debt Spiral?

Yields reached a 24-year high last Thursday, but the United States does not refinance its debt in one go. According to TD Securities, the weighted-average maturity — the average time until repayment — stands at roughly 5.9 years.

Bonds, not including short-term bills, still have an average coupon (fixed interest rate) of 3.1%.

TD forecasts interest expenses of roughly $1.1 trillion for fiscal 2026. If yields remain steady, it projects $1.4 trillion in 2027 and $1.6 trillion in 2029.

Additionally, the Congressional Budget Office forecasts that public debt will reach about 101% of GDP in fiscal 2026.

“A fiscal apocalypse is not upon us just yet.”

That assessment comes from TD Securities strategists Gennadiy Goldberg and Molly Brooks, in a note cited by CNBC.

What Would Turn the Math Against Washington?

TD attributes the increase partly to a robust economy, anticipated Fed rate increases, and rising oil prices. Ian Lyngen of BMO Capital Markets points to stronger current and projected growth as well.

Matthew Reese of L&G Asset Management cautions that the cycle deteriorates as nominal growth slows. He notes, however, that Japan averted a crisis despite higher debt and sluggish growth.

A BMO survey sees housing as the most probable initial victim of higher real rates, with 42% of respondents choosing it, versus 26% for stocks. In contrast, just 1% identified the labor market.

Meanwhile, Hong Kong's Hang Seng Index fell up to 3% on Friday, as the territory’s currency peg transmitted US yields to local markets.

The buffer seems to rely on continued growth. Lyngen argues that the only durable check on yields is definitive proof that the economy or risk assets are weakening.