Long-term US Treasury yields have climbed to their highest level in more than two decades, once again pushing Washington's growing debt burden into the market spotlight.

The 10-year Treasury yield has now topped 5%, while the US government's net interest expense for the first 11 months of fiscal 2026 is estimated at about $1.05 trillion. Markets fear that high rates and heavy debt could form a self-reinforcing cycle that eventually turns into a fiscal crisis. But several institutions believe the US is still some distance from a true "fiscal meltdown." The current rise in yields is not driven entirely by fiscal worries 鈥?economic growth, energy prices, expectations of further Federal Reserve rate hikes, and corporate financing demand tied to AI investment are also major factors behind this bond selloff.

The trillion-dollar interest bill is rising, but fiscal risk will not be repriced all at once

The most worrying path is not complicated: investors demand higher yields because of the expanding debt load, the government's interest costs rise, forcing it to issue more debt, and that added supply in turn demands even higher yields. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, has warned that if "interest generates debt and debt generates interest," a debt spiral could eventually form.

TD Securities strategists Gennadiy Goldberg and Molly Brooks, however, believe the "fiscal doomsday has not yet arrived." TD Securities estimates that if yields remain at current levels for a prolonged period, US federal government interest expense could rise from about $1.1 trillion in fiscal 2026 to $1.4 trillion in 2027, $1.5 trillion in 2028, and $1.6 trillion in 2029.

The key buffer comes from the maturity structure of US Treasuries. The weighted average maturity of US government debt is currently about 5.9 years, so the Treasury does not need to immediately refinance all outstanding debt at current market yields above 5%. The average coupon on existing medium- and long-term Treasuries is still only about 3.1%, meaning high rates only feed into government financing costs gradually as old debt matures and is replaced by new debt. This makes the fiscal impact of high yields more like a year-by-year accumulation rather than a one-time jump.

Nominal economic growth remains above the government's average financing cost

Another important factor is economic growth. The average rate on existing US government debt is about 3.4%, while the third estimate released by the Bureau of Economic Analysis on September 30 showed US nominal GDP grew at an annualized rate of 8.5% in the second quarter, with real GDP up 2.2%. As long as nominal economic growth remains clearly above the government's average debt financing cost, the pace at which debt deteriorates relative to the size of the economy will be somewhat constrained.

Matthew Reese, head of global bond strategy at L&G Asset Management, believes the US and other developed economies do face the risk that high yields increase the fiscal burden, which in turn keeps pushing up financing needs, but market fears of an immediate US fiscal crisis are "somewhat exaggerated." The US also enjoys the special status that comes with the dollar being the world's main reserve currency, as well as the world's largest and most liquid sovereign bond market. This gives the US Treasury market depth that other economies typically lack when financing conditions worsen.

High debt itself does not necessarily trigger a crisis immediately. Japan has long maintained a government debt ratio clearly higher than that of the US while experiencing lower nominal economic growth, and it has not automatically fallen into a sovereign debt crisis.

Yields above 5% are not entirely the market punishing fiscal policy

If the current Treasury selloff stemmed mainly from investors losing confidence in America's ability to repay, the fiscal risk assessment would look very different. But the current market evidence is more complex. TD Securities believes the recent rise in yields has also been affected by US economic resilience, expectations of further Fed rate hikes, rising oil prices, corporate bond issuance, and short-term funds adjusting positions.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, noted that the rise in long-end yields is largely a rise in real rates, reflecting the market repricing real economic growth and future growth expectations. AI capital spending is also beginning to compete with the US government for bond market funds. Five major AI companies 鈥?Alphabet, Amazon, Meta, Microsoft, and Oracle 鈥?have issued about $220 billion in bonds this year, more than double last year's full-year total. Increased bond supply allows investors to demand higher yields and further pushes up funding costs across the entire financial system.

The real risk lies in how long high rates persist

That said, this does not mean the US debt path is safe. The Congressional Budget Office projects that federal debt held by the public will be about 101% of GDP in fiscal 2026. Under the baseline scenario, that ratio could rise to 175% by 2056. If long-term rates are 1 percentage point higher than the baseline forecast, the debt ratio could reach 222% by 2056. The CBO also estimates that the federal budget deficit has already reached about $2 trillion in the first 11 months of fiscal 2026, with net interest expense for the fiscal year expected at about $1 trillion.

So the current debate is more about timing. If nominal economic growth remains rapid, the US can gradually absorb higher interest costs; if the economy slows markedly while a large amount of low-rate debt is refinanced at higher yields over the next few years, fiscal pressure will rise quickly. A BMO survey shows investors currently believe high real rates are most likely to visibly affect the housing market first, with 42% of respondents choosing that area; equities and corporate credit accounted for 26% and 21% respectively, and only 1% believed the labor market would come under obvious pressure first. Lyngen believes the factor that could truly limit further rises in yields may be indisputable evidence that the real economy or risk assets are beginning to come under clear strain from high financing costs.