US deficit and Treasury yields create a costly fiscal feedback loop

The US deficit treasury yields problem is becoming more costly: the federal deficit reached $1.992 trillion in fiscal 2026, up 12% from the previous year, according to Treasury data reported by CNBC. The figure equates to about 6.2% of gross domestic product using a third-quarter GDP estimate, while the 10-year Treasury yield stood at 5.1% through midday Friday, CNBC reported.

That combination affects both public finances and borrowing costs across the economy. The 10-year yield was 114 basis points higher than at the end of February, according to CNBC. A basis point is one hundredth of a percentage point.

How do higher Treasury yields worsen the US deficit?

The government finances deficits by issuing debt, including longer-dated Treasury securities. Greater issuance can add to the supply investors must absorb, and investors may demand higher returns to hold long-term bonds if they expect persistent borrowing needs. Deficits are one factor in yields, rather than their sole determinant.

CNBC cited several additional forces behind the rise in long-term yields: the war with Iran, higher oil and diesel prices, the prospect that central banks may keep rates higher, and stronger competition for capital. Companies are issuing hundreds of billions of dollars in debt for artificial-intelligence infrastructure, CNBC said, giving global investors other long-term debt options alongside Treasurys.

Higher yields raise the cost of servicing and refinancing federal debt, which can then make future deficits larger. The Congressional Budget Office estimates, as reported by CNBC, that interest rates remaining 0.5 percentage point above its assumptions would add $1.9 trillion to cumulative deficits over 10 years. A 1.5-percentage-point overshoot would add $6 trillion. Those are conditional scenarios, not forecasts.

The CBO expects the 10-year Treasury yield to average 4.3% over the coming decade, compared with the 5.1% level reported by CNBC. The fiscal effect would depend on how long yields remain above that assumption and on rates across the broader economy.

Where do households feel the effect?

Mortgage rates tend to move with the 10-year Treasury yield. CNBC reported that the average 30-year fixed mortgage rate was around 7.5%, and cited Redfin data showing pending home sales fell 4% in September, the largest monthly decline in three years. Higher Treasury yields can also feed through to the financing costs faced by businesses and consumers.

Treasury Secretary Scott Bessent has called for reducing the deficit to below 4% of GDP by the end of President Donald Trump’s term, CNBC reported. The outlet said a credible commitment to deficit reduction would probably lower long-term yields, though the size of the effect would depend on the scale of any measures and other economic conditions.

Faster growth could improve the fiscal outlook, but it would not by itself offer an easy solution. The Committee for a Responsible Federal Budget estimated that balancing the budget through growth alone would require 7.2% annual growth for a decade, CNBC reported. Second-quarter GDP growth was revised to a 2.2% annualized rate.

CNBC said anticipated divided government after the midterms could limit the prospects for near-term deficit action. It also cautioned that a full US debt crisis is not an imminent certainty: the debt threshold that would prove unsustainable is not known, even as the reported rise in borrowing costs tightens the fiscal constraint.

This story draws on original reporting from CNBC.