U.S. government debt surpasses $40 trillion for the first time, soaring by one-third in less than five years; risk of fiscal "vicious cycle" intensifies

According to Zhitong Finance APP, the total federal debt of the United States has surpassed $40 trillion for the first time, growing by about one-third in less than five years. Meanwhile, long-term U.S. Treasury yields remain at multi-year highs and interest expenses are rising rapidly, raising market concerns about the sustainability of U.S. finances and the risk of a feedback loop between debt and financing costs.

Data released by the U.S. Treasury Department on Wednesday showed that as of Tuesday's close, the total outstanding U.S. public debt stood at $40.05 trillion. In comparison, U.S. debt did not surpass $30 trillion until January 2022, meaning that in just four and a half years, the government has added more than $10 trillion in new debt.

As the $40 trillion mark is breached, the U.S. Treasury is attempting to ease the pressure brought by rising long-term financing costs. Treasury Secretary Janet Yellen announced on Wednesday a further expansion of long-term U.S. Treasury buyback plans to improve liquidity in the long-term bond market. Following the announcement, bond prices rose and long-term yields fell significantly.

However, the market believes that, compared to the $40 trillion milestone itself, the more noteworthy issue is the continuously rising cost of debt financing. Deutsche Bank’s chief U.S. economist Matthew Luzzetti commented that surpassing the $40 trillion mark may briefly bring renewed focus on fiscal issues, but this number is not a critical tipping point for debt trends. Previous fiscal forecasts had already indicated debt would reach this scale.

The real issue is that persistently high U.S. Treasury yields are significantly increasing the government’s debt-servicing burden. Last week, a 30-year Treasury auction resulted in the highest financing costs in about 25 years, and a 10-year Treasury auction held the day before saw financing costs hit their highest levels since 2007.

As investors demand higher yields to hold U.S. government bonds, the Treasury’s interest expense continues to rise. So far, for fiscal year 2026, U.S. government interest costs have already reached $1.17 trillion, up 15% from the same period last year. Interest expenses have now become the third-largest spending item in the federal budget, behind only healthcare-related expenditures and Social Security.

This has led to growing market concerns that U.S. finances could fall into a so-called ‘debt vicious cycle’: the larger the government debt, the more interest needs to be paid; expanding interest payments further raise fiscal deficits and borrowing needs; an ever-increasing supply of bonds may then prompt investors to demand even higher yields, which ultimately pushes financing costs even higher.

U.S. public debt includes not only marketable Treasuries held by investors but also intra-government debt, such as obligations formed when Social Security surpluses are invested in specially issued Treasury securities.

In recent years, the U.S. fiscal deficit has remained at historically elevated levels. During the global financial crisis and the COVID-19 pandemic, economic recession led to falling tax revenues, while government bailouts and fiscal stimulus spending surged, resulting in an obvious acceleration in debt accumulation. In addition, tax cuts implemented by past administrations, war expenditures, and large-scale fiscal stimulus policies have further increased the debt burden.

Data compiled by Deutsche Bank economists shows that tax cuts implemented by the Bush administration in the early 2000s are estimated to have reduced fiscal revenues by about $3.3 trillion through the mid-2010s; tax reductions passed by the Trump administration in 2017 are expected to reduce fiscal income by at least another $1.5 trillion in their first decade.

On the spending side, the wars in Iraq and Afghanistan had cost over $1.6 trillion by the mid-2010s. The Biden administration’s 2021 ‘American Rescue Plan’ is expected to increase the fiscal deficit by about $1.8–1.9 trillion over ten years, not including related interest expenses.

When Janet Yellen took office in 2025, she indicated her hope to reduce the U.S. fiscal deficit to about 3% of GDP by the end of Trump’s second term. However, as of July this year, the ratio is still around 6%, and the market remains skeptical as to whether U.S. fiscal conditions can see substantive improvement in the coming years.

Political roadblocks have also made it even harder to reduce the deficit. The Republican Party has long opposed raising government revenues through tax increases, while both Republicans and Democrats have been cautious about cutting politically sensitive spending on healthcare and retirement benefits. At the same time, Trump is considering introducing new tax cuts before the November midterm elections, while also boosting defense spending.

The rapid increase in debt also means that the U.S. is nearing a new round of debt ceiling risks. The current statutory debt ceiling is $41.1 trillion, leaving only about $1 trillion in leeway before it is reached. Fitch predicts the U.S. could hit this debt ceiling by mid-2027, at which point Washington may once again see a political battle over raising the debt limit.

On August 13, Fitch affirmed its AA+ sovereign credit rating for the U.S., but also warned that the government has yet to take meaningful action to address its massive fiscal deficit. With an aging population, government spending pressures are expected to rise further in the next decade, while an ever-increasing debt load will make the U.S. economy more vulnerable to future shocks.

Michael Peterson, chairman of the Peter G. Peterson Foundation, said crossing the $40 trillion threshold should serve as a ‘wake-up call’ for Washington. If the U.S. cannot control the growth of its debt, continued large-scale borrowing will put upward pressure on interest rates, which will eventually impact financing costs for household mortgages, car loans, and credit cards.