Key takeaways
The growing U.S. national debt is drawing increased attention.
The estimated national debt stands at more than $36 trillion, a record amount that has doubled over the past 15 years.
A major concern is not just about the growing level of debt, but how today’s higher interest rate environment affects debt repayment.
With new policy initiatives under consideration by the Trump administration, the burgeoning federal government debt takes on greater visibility. The national debt totals $36.2 trillion.1 Over the past 15 years, federal debt has doubled in size. Government policymakers and those outside of government frequently warn of potential negative consequences should the mounting debt trend continue. Up until now, the surging national debt has yet to notably detract from economic growth or capital market performance.
Yet debt issues are likely to draw increased attention. After 2025, reduced tax rates set by 2017’s Tax Cut and Jobs Act are set to expire. Among other initiatives, an extension of the tax cuts included in the 2017 legislation is high on President Donald Trump’s and the Republican-led Congress’ priority list. Without offsetting spending cuts or other sources of revenue, such as higher tariffs on foreign imports, tax cut extensions would likely exacerbate debt problems.
“Markets are aware of the issue, but not fully prepared for it,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “Bond markets are where investor concern over rising debt will be most visible.” Yields on the 10-year U.S. Treasury note are hovering near 4.5%, which Haworth says may reflect some market uncertainty about continued debt growth.
The rising costs associated with the federal government’s large accumulated debt add to the challenge. Interest rates jumped significantly beginning in 2022. As a result, interest costs on the debt are a larger component of federal government spending. The average interest rate for all federal government-issued interest-bearing debt has jumped in recent years, to 3.28% as of December 31, 2024. That’s more than double the average interest rate paid in 2020.2
In anticipation of pending Federal Reserve (Fed) interest rate cuts from recent high levels (the upper level on the federal funds target rate stood at 5.5% for more than a year), yields across the bond market declined in early 2024. However, once the Fed implemented its initial rate cut, 10-year Treasury bond yields trended higher. Between mid-September and mid-December, 10-year Treasury yields rose from 3.63% to 4.79%. Rates retreated some since that peak.3 “Part of what we’re seeing with the recent upturn in long-term bond yields is tied to deficit concerns,” says Haworth. “There’s a lot of uncertainty about how government policy will impact Treasury prices going forward.”
A key investor concern is the extent to which Treasury debt issuance can potentially impact fixed income and equity markets. “Higher bond yields may lead investors to put more money into fixed income instruments rather than into stocks,” says Haworth. That could have negative stock market ramifications. “Yet for now, government debt is not a problem until the bond market deems it a problem.”
In 2025’s first quarter, the U.S. Treasury anticipates borrowing $815 billion by issuing new privately held, net marketable Treasury debt securities. In the second quarter, Treasury projects borrowing another $123 billion. In 2024’s closing three months, the Treasury borrowed $620 billion.4
While Treasury debt expands, there are concerns over the shifting pool of Treasury buyers. The Fed continues winding down its balance sheet of bond holdings by redeeming a portion of its Treasury securities rather than purchasing Treasuries, as it did prior to 2022. The role of foreign buyers is diminished as well. Growing trade tensions may be a factor. “China is less likely to expand its Treasury holdings if it doesn’t have as many dollars to invest based on reduced U.S. trade,” says Haworth. That could become even more of an issue with recently-implemented new tariffs on Chinese goods. As a result, individual investors, either through direct purchases or via mutual funds, have taken on a much larger role as Treasury debt purchasers. Reduced involvement by the Fed and foreign buyers may contribute to upward interest rate pressure.
The issues created by the national debt don’t appear to be immediate. “The government’s debt is manageable today,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management. “But the ability to sustain rising debt levels over time is the issue that concerns some investors.” A key question, according to Merz, is how quickly the government addresses the challenge. He says the sooner the long-term debt problem is addressed, the less painful it will be to resolve.
“The government’s debt is manageable today,” says Bill Merz, head of capital markets research for U.S. Bank Asset Management. “But the ability to sustain rising debt levels over time is the issue that concerns some investors.”
For perspective, analysts frequently compare total national debt to the nation’s gross domestic product (GDP), which measures the size of the economy. In late 2024, for example, the nation’s total publicly held debt amounted to approximately 100% of the full value of the economy as measured by GDP.5 This number is expected to continue to climb. While the absolute debt-to-GDP ratio may be manageable, more concerning is this measure’s dramatic trend upward.
To reduce the debt, Haworth points out that the government must first eliminate deficit spending on an annual basis. “Next, you need to pay down debt, and that too will take money out of the private sector.” This is due to increased taxes, lower federal government spending, or both, aimed at lowering the debt, which could take a toll on the economy.
Haworth also points out that much of the nation’s long-term debt problem centers on funding commitments for Social Security and Medicare. “We have an aging population and fewer workers in succeeding generations to pay the costs of these programs,” says Haworth. “These are manageable budget matters, but Congress hasn’t yet seriously considered solutions to them.”
There are reasons to be concerned that a larger supply of bonds and reduced market participation by foreign buyers and the Fed might put upward pressure on interest rates, though that doesn’t yet seem to be a significant concern. Haworth says interest rates matter for equity investors because higher rates make bonds more competitive with stocks. “Once interest rates stabilized in mid-2023, stock valuations moved higher, reflecting both higher earnings and expectations that rates will trend lower,” says Haworth.
Investors may wish to consider overweight positions in equities to capitalize on continued economic growth. Fixed income holdings may be positioned with a modestly less-than-neutral weighting. However, Treasury securities and other fixed income investments should continue to play an important role in a broadly-diversified portfolio. U.S. Bank will closely monitor the government’s increasing debt burden and policies that influence long-run sustainability for signs of change in the broader investment landscape. Consider talking with your financial professional to make sure you have a comfort level with your current plan and investment position.
The rate on debt issued by the U.S. Treasury varies constantly. Therefore, the rate paid on debt issued on specific dates will differ from day-to-day. In terms of the accumulated Treasury debt securities outstanding on the open market, the average interest rate paid by the government was 3.28% as of December 31, 2024. That’s more than double the average interest rate applied to U.S. government debt in 2020.2
Government debt, funded by U.S. Treasury debt securities, is funded by a variety of buyers. The largest group of buyers are foreign entities (governments, institutions and individuals) who own 34% of the debt. The Federal Reserve Bank (Fed) is also a major buyer, but since 2022, the Fed has reduced its Treasury debt holdings. Individuals and mutual funds are taking on a more important role as buyers of U.S. debt. (Source: U.S. Bank Asst Management Group analysis.)
Debt represents a shortfall of revenue to meet all current expenses. In February 2025, that debt totaled $36.2 trillion.1 The U.S. federal debt represents accumulated federal government deficits over a period of years. In most years, Congress, when it approves spending measures, is not required to balance the budget. Without sufficient tax revenue and fees to meet approved expenses, an annual deficit results, adding to the accumulated federal debt.
With the 2025 fiscal year underway, Congress has yet to pass a federal budget.
As investors consider Donald Trump’s second presidential term, they’re increasingly focused on how likely policy changes could impact markets and the economy.
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