--- title: "Interest costs are consuming fiscal space Analysts: US Treasury yields are being \"artificially elevated\"" type: "News" locale: "en" url: "https://longbridge.com/en/news/275818602.md" description: "The U.S. Congressional Budget Office predicts that the fiscal deficit will continue to expand over the next decade, with interest expenditures rising rapidly. It is expected that by 2036, the annual fiscal deficit will reach $3.1 trillion, accounting for 6.7% of GDP. Analyst Brian Mulberry pointed out that concerns in the bond market regarding the fiscal outlook have led to current interest rates being higher than they should be. If the market had more confidence in controlling the deficit and inflation, interest rates could be lower by 100 basis points" datetime: "2026-02-12T22:36:04.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/275818602.md) - [en](https://longbridge.com/en/news/275818602.md) - [zh-HK](https://longbridge.com/zh-HK/news/275818602.md) --- > Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/275818602.md) | [繁體中文](https://longbridge.com/zh-HK/news/275818602.md) # Interest costs are consuming fiscal space Analysts: US Treasury yields are being "artificially elevated" The latest forecast from the Congressional Budget Office (CBO) indicates that the U.S. fiscal deficit will continue to expand over the next decade, while interest expenditures are rapidly rising and occupying an increasingly larger share of total government spending. This trend not only increases the fiscal burden but is also pushing up market interest rates that should be lower. According to the report released by the CBO on Wednesday, by 2036, the annual U.S. fiscal deficit is expected to rise to $3.1 trillion, accounting for 6.7% of Gross Domestic Product (GDP); while for the fiscal year ending September 30, 2026, the deficit is projected to be about $1.9 trillion, or 5.8% of GDP. When government spending consistently exceeds tax revenue, the Treasury must finance itself by issuing government bonds, treasury bills, and notes to the public. An increase in debt supply often requires higher yields to attract investors, with the specific impact depending on the maturity structure. According to Dolphin Research, Brian Mulberry, a senior portfolio manager at Chicago-based asset management firm Zacks Investment Management, pointed out that the bond market has been "continuously expressing concerns about the fiscal outlook," with the core issue being that the size of the deficit is showing an almost exponential growth trend. He believes that it is this concern that has caused current interest rates to be higher than they would be under more manageable fiscal conditions. Mulberry further estimates that if the market had more confidence in the U.S. government's ability to control spending, reduce the deficit, and curb inflation, the Federal Reserve's current target policy rate range of 3.5% to 3.75% could be about 100 basis points lower; the entire U.S. Treasury yield curve would also shift downward. For example, the yield on the 10-year U.S. Treasury bond, which affects mortgage loans, auto loans, corporate debt, and capital investment costs, closed at around 4.1% on Thursday. In his view, if not for the constraints of the fiscal deficit, a more reasonable range for the 10-year yield should be between 3.5% and 3.75%. Currently, the 10-year yield is relatively controlled, partly because the U.S. Treasury has increasingly relied on short-term treasury bills to manage financing costs in recent years. However, the CBO points out that over time, net interest expenditures will increasingly occupy a larger share of the deficit structure, becoming an important source driving the expansion of the fiscal gap. Subadra Rajappa, head of research at Société Générale in New York, stated that in the long term, the U.S. fiscal path "is indeed concerning," but the bond market is currently more focused on short-term and medium-term financing capabilities. She noted that the market's tolerance for U.S. debt and deficits is significantly higher than its attitude towards other countries. The continuously expanding fiscal deficit and rising interest costs may also undermine the affordability goals emphasized by the Trump administration regarding housing and living costs. On one hand, higher borrowing costs mean that the fiscal space available for public services, transportation infrastructure, national defense, scientific research, and healthcare is being compressed; on the other hand, the Treasury needs to continuously increase the supply of government bonds. If investor demand for future auctions weakens, yields could rise uncontrollably, further impacting broader financial markets The market had previously widely expected that, with a high proportion of short-term Treasury bill issuance, the Treasury Department would ultimately increase the issuance of interest-bearing notes and long-term Treasury bonds. However, earlier this month, the Treasury maintained its guidance that "the scale of note and bond auctions will remain unchanged for at least the next few quarters," which dashed those expectations. The day after the release of the CBO report, influenced by deteriorating stock market sentiment, the U.S. Treasury market rebounded. 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