US Debt Hits $37 Trillion: What It Means for Markets

US public debt has recently reached $37 trillion, which is a record high. This impacts everything from family mortgages to global investors who traditionally treat US government bonds as the safest asset in the world. The problem is that if Congress fails to raise the debt ceiling, the Treasury could run out of cash. Even a temporary default would rattle financial markets, push up borrowing costs, and risk triggering a global recession.

To understand why debt has grown so sharply, three reasons stand out: persistent budget deficits, an ageing population, and crisis spending. US has run annual budget deficits for decades, spending more than it collects in taxes. These gaps accumulate, increasing the overall debt. At the same time, America’s population is ageing. More retirees are drawing Social Security and Medicare, people are living longer, and healthcare costs continue to rise faster than inflation. These structural obligations lead to higher government spending for the future.

Big crises have also left a lasting mark. The 2008 financial crash and the COVID 19 pandemic resulted in emergency spending to stabilise markets and rescue households. While necessary, these interventions permanently added to the debt burden. Historically, US debt has only reached levels during World War II. Back then, post-war economic growth helped bring debt down. Today’s challenge is different: debt is surging in peacetime, driven not by a temporary shock but by ongoing structural pressures.

Rising debt matters because it directly affects US Treasury yields the interest rates the government pays to borrow. Treasuries are key to the financial system, setting benchmarks for everything from corporate loans to household mortgages. As investors demand higher yields to offset fiscal risks, borrowing costs rise across the economy.

How Have Bond Yields Reacted?

The surge in US debt has captured the attention of markets worldwide. Normally, fears of a potential default push Treasury yields higher, as investors demand a premium for lending to the government. In times of crisis, however, this pattern can briefly reverse: investors rush to the safety of government bonds, temporarily pushing yields down. The 2008 financial crisis is a clear example, when Treasuries initially benefited from a flight-to-safety effect even as broader markets tumbled.

Today, however, yields are trending upward. The 10-year Treasury recently surpassed 4.6%, signalling higher borrowing costs for the government. This rise has ripple effects: mortgages, car loans, and corporate borrowing all become more expensive.(WSJ, Bloomberg, Fed data).

Why Yields Are Moving

Treasury yields are determined by a balance of risk and safety. Investor concern over a potential default pushes yields up, while periods of uncertainty can sometimes trigger a flight to safety. But this time, the situation is different. Rising debt levels, over the debt ceiling, and persistent inflation are prompting some investors to question whether Treasuries remain truly risk free. Some continue to seek safety in bonds, while others demand higher yields to compensate for perceived risk or look elsewhere for security. Inflation also plays a role: if bond returns lag behind rising prices, investors demand higher yields to protect their purchasing power. The result is a more complex and volatile market than in past crises.

Economic Effects

Higher yields have consequences. For the government, each percentage point increase in borrowing costs translates into tens of billions of extra interest payments, limiting room for other spending. Stock markets can also feel the strain, as investors shift away from equities. Families face higher mortgage and loan rates, which can slow housing demand and reduce disposable income. Globally, US Treasuries remain the benchmark safe asset, so disruptions ripple through currencies, trade, and international investment, underlining that America’s debt situation is a global concern.

Conclusion

Over the past five years, Treasury yields have steadily climbed as markets adjust to America’s rising debt burden. Investors are demanding higher returns to hold US debt, and that shift is filtering through to mortgage rates, corporate borrowing, and global financial conditions. With debt now at $37 trillion, higher yields are already making it more expensive to borrow across the board. If this trend continues without a plan to get debt under control, the economic strain will only deepen.