Treasury Yields Hit Two-Decade Highs as CBO Warns U.S. Debt Could Reach 222% of GDP

U.S. Treasury yields have surged to their highest levels in roughly two decades, pushing borrowing costs sharply higher and prompting the Congressional Budget Office to publish new projections showing how much worse the nation's debt trajectory could become. The 10-year Treasury yield reached 5.23% on Friday, its highest level since 2007, while the 30-year yield hit 5.49%, the highest since 2004.

The rise has been rapid. The 10-year yield has climbed more than a full percentage point since just before the start of the Iran war, as oil prices have risen on Middle East tensions, AI hyperscalers spend hundreds of billions of dollars a year, the economy runs hot, and total U.S. debt stands at $40 trillion. Those forces have already pushed yields well past the CBO's most recent long-term forecasts, issued in February, which projected a 10-year yield of 4.1% this year, 4.2% in 2027, 4.3% from 2028 to 2031, and 4.4% from 2032 to 2036.

The spike drew the attention of Sen. Jeff Merkley, the ranking Democrat on the Senate Budget Committee, who asked the CBO for updated numbers. In a letter responding to the senator, CBO Director Phillip Swagel addressed a scenario in which interest rates rise until they are 1 percentage point above the baseline. Before incorporating macroeconomic effects, the CBO estimated that the primary deficit, which excludes net outlays for interest, would be 0.4 percentage point larger by 2056 than under the baseline. But the total deficit would be 4.9 percentage points larger, illustrating how much of the additional burden comes from interest expenses.

Under that scenario, the total deficit would balloon to 14% of GDP, up from 5.8% expected this fiscal year and well above the 3.8% average from 1976 to 2025. Publicly held debt would explode to 222% of GDP by 2056, compared with 101% today and 47 percentage points higher than the CBO's current baseline forecast for that year.

Annual interest expenses on the debt are already at $1 trillion, while the budget deficit is on pace to reach $2 trillion this year, with no sign of political willingness to rein them in. Yields set the pace for other borrowing costs and determine how much the Treasury Department must pay in interest, meaning higher rates can accelerate the debt's growth.

As debt soars, the CBO said the U.S. economy will slow and will not be able to keep up with the pace of borrowing, because capital is funneled toward Treasury bonds rather than more productive uses. The agency said GDP growth would be 0.1 percentage point below its baseline, dampening hopes that the U.S. can grow its way out of the debt. Treasury Secretary Scott Bessent has said that is possible if growth reaches 3%.

The CBO also suggested its numbers under this scenario would be even worse after accounting for effects on the broader economy. «The resulting increase in debt as a percentage of GDP increases interest rates on Treasury securities even further,» Swagel wrote. «Thus, macroeconomic effects push interest rates above the initial boost that was built into the scenario.»

For comparison, the CBO presented another scenario in which the debt-to-GDP ratio somehow stays flat at its current level of 101%. In that case, the primary deficit would be 2 percentage points smaller than the CBO's baseline by 2056, the total deficit would be 5.6 percentage points smaller, and publicly held debt would be 74 percentage points smaller. GDP growth would be only 0.05 percentage point higher than the baseline, before accounting for additional macroeconomic spillover effects.

«The increased GDP growth encourages more investment, increasing the amount of capital available to workers,» Swagel wrote. «That higher capital stock raises the marginal product of labor, encouraging more labor, which results in further GDP growth.»

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Connor Quincy

Technology Reporter

Connor Quincy covers public affairs, politics, business, culture and daily news for Core Memo. The role focuses on verification, context, and clear explanations for readers.

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