US Debt Hits $40 Trillion as Treasury Yields Reach 5.04%, Interest Payments Top Defense

The United States gross national debt crossed $40 trillion in August, capping a year in which the government added roughly one trillion dollars in new debt every five months. The milestone came as the 10-year Treasury yield hit 5.04%, its highest level since 2007, and the Federal Reserve raised interest rates for the first time since 2023. Oil prices and inflation contributed to the yield spike, but analysts consistently list mounting government debt among the primary drivers.

The deficit reached $2 trillion with a month still remaining in the fiscal year. In 2025, Moody's became the last of the three major credit rating agencies to strip the United States of its AAA rating, following S&P in 2011 and Fitch in 2023. The downgrades reflect growing concern about the trajectory of federal borrowing and the government's ability to manage its obligations.

The cost of servicing that debt has already surpassed one of the most significant line items in the federal budget. In fiscal year 2025, net interest payments hit $970 billion, approximately $150 billion more than the nation spent on national defense. Interest costs rose another $111 billion, or 12%, this year and are projected to more than double to $2.1 trillion by 2036, making interest the fastest-growing major program in the budget.

The structural challenges extend beyond the raw numbers. For the first 200 years of American history, Congress generally lived within its means, operating under what was once called «old-time fiscal religion.» The Congressional Budget Act of 1974 established a process for a budget resolution and 12 appropriations bills, but Congress has completed that process on time exactly four times in the half-century since. This year, with none of the 12 bills enacted, lawmakers punted to December 11 to allow members to campaign first.

Efforts to force fiscal discipline have repeatedly failed. As a Senate budget staffer, one former aide helped bring an actual budget resolution to the floor in the summer of 2022, an attempt to make the Senate do what the Budget Act requires. The motion to proceed failed 34–63 and generated no news coverage. The vote was not against a specific budget but against debating any budget at all, demonstrating that political will cannot be legislated.

Budget gimmicks have become pervasive. Statutory PAYGO, first enacted in 1990 and made permanent in 2010, requires new spending to be offset with new revenues. But spending occurs in the first few years while the taxes show up later — and then conveniently never materialize. The Affordable Care Act's revenues followed this pattern, with Congress deferring taxes and then making most of them go away. The caps Congress writes, Congress waives: «emergency» designations exempt spending from every fiscal rule, and the PAYGO scorecard is waived with a few words on the last page of every omnibus bill.

Meanwhile, the Pentagon has failed eight straight audits. In 2022, it could not fully account for 61% of its $3.5 trillion in assets. The fiscal fights that dominate cable news cover only 27% of the budget — discretionary spending. Politicians get to ignore mandatory spending, which accounts for 60%, and interest on the debt, which consumes 13%.

The Congressional Budget Office has repeatedly warned that rising debt risks a fiscal crisis in which investors lose confidence, rates rise abruptly, and the dollar's reserve status erodes. Foreign investors already hold a shrinking share of US debt. The reserve currency status is why the world lends the US money cheaply, why the country can run deficits that would break any other nation, and why American sanctions have teeth. That privilege rests on confidence that America pays its bills.

Some argue the bet is that as long as the US remains better than the alternatives, money has nowhere else to go. But «better than everybody else» is a relative measure, and relative measures move. Britain was the world's reserve currency until it wasn't. The ratings agencies have spoken, the government's own scorekeeper has put its warning in writing, and Congress remains asleep at the wheel. Heart attacks do not announce themselves, and when one shows up, austerity looks like stents and valves — presuming you get to the ER in time.

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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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