U.S. National Debt: When the Treatment Becomes the Side Effect

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In medicine, the term "prescription cascade" describes an insidious cycle. A patient takes a medication and experiences unwanted side effects. To counter these, doctors prescribe another medication, which in turn triggers new symptoms. Eventually, the patient is taking a handful of pills not to recover, but merely to cope with the consequences of previous treatments. The U.S. government now finds itself in a similar situation. Washington is borrowing new money to service the interest on its existing debt. For investors, the issue isn't the risk of a sudden default or debt haircut. What matters far more is how the Treasury Department and the Federal Reserve adjust their policy before interest costs overwhelm the budget.

$40 Trillion in Debt Is Only Part of the Problem

U.S. national debt surpassed the $40 trillion threshold for the first time on August 19, 2026. It took just five months to jump from $39 trillion to $40 trillion. Ten years ago, the debt stood at $19.4 trillion — it has nearly doubled since 2017. In the current fiscal year, the debt mountain has already grown by $1.8 trillion, while the budget deficit in July reached $432.3 billion — the highest monthly figure since March 2021.

Because the U.S. has a sovereign central bank and its own reserve currency, the sheer size of the debt alone does not yet constitute insolvency. What is alarming, however, is the level of yields in the bond market. The yield on 30-year U.S. Treasurys climbed to 5.34% on August 18, its highest level since April 2007. Interest payments now account for about 14% of the federal budget — and already exceed spending on Medicare.

Competition From Hyperscalers

The real breaking point lies in refinancing. The U.S. must continuously replace maturing debt with new issuance. A large portion of that existing debt was issued during the recent period of low interest rates and is now being refinanced at drastically higher rates. That drives up interest costs, widens the deficit, and forces the government to take on even more debt.

This rise in interest rates isn't driven by fears of runaway inflation. The breakeven spread between nominal and inflation-protected 30-year bonds has held stable at 2.2% for four years — the market firmly expects inflation to return to the central bank's target.

Real interest rates surged from -0.4% at the end of 2021 to nearly 3%—a textbook case of demand outstripping supply. At full employment, Washington is still borrowing 6% to 7% of GDP a year. Those Treasury issues no longer have the bond market to themselves: hyperscalers are now competing for the same investors to fund their voracious buildout of data infrastructure. At the same time, two of the biggest buyers of the past decade have stepped back: the Federal Reserve spent 2022 through 2025 shrinking its Treasury portfolio, and foreign central banks and reserve managers have been trimming their holdings too—leaving a thinner buyer base just as issuance surges. Fewer buyers, more issuance: yields are being pushed higher.

The Policy Response

A blunt, short-term fix won't hold in this environment. The Treasury Department and the Federal Reserve cannot leave the market to its own devices — they are already taking concrete steps:

Yield-curve management through buybacks in the 10- to 30-year segment, alongside a greater shift in issuance toward short maturities.

Relaxation of capital-adequacy rules for the eight largest U.S. banks, freeing up balance-sheet capacity for government bonds.

Statutory reserve requirements for stablecoins under the GENIUS Act, estimated to generate up to $1 trillion in additional money-market demand.

New customs revenue through trade-related powers, aimed at narrowing the budget deficit.

Liquidity injections by the Federal Reserve at the short end of the curve, should market tensions persist.

These steps cushion the sharpest yield spikes at the long end. For investors, the current rate plateau offers an opportunity that simply didn't exist during the zero-rate decade.

Responsible Action Leads to Reliability

Investors can now lock in a portfolio of top-tier corporate bonds offering attractive yields for years to come. As in the years leading up to the turn of the millennium, the capital market once again offers appropriate compensation for the term risk investors take on. We'd caution against U.S. Treasurys and the dollar given the interventions ahead. On equities, we favor high-quality companies with strong balance sheets.

A responsible physician doesn't rashly discontinue treatment because of side effects. Instead, they fine-tune the dosage and combine active ingredients so the body stays stable.

That is precisely the balancing act the Treasury and the Federal Reserve are performing with buybacks, regulatory measures, and new pools of buyers. The resulting interest rate environment is not a sign of crisis — it marks the welcome return of reliable returns for long-term investors.