Debt Avalanche: Why Rising Treasury Supply Is Pushing Bond Yields Past 5%

How Washington's borrowing binge is lifting term premiums, resetting the neutral rate, and making every American loan more expensive.

What to Know

• Federal debt held by the public stands at 100% of GDP, projected to reach 120% by 2036
• After the Fed cut rates in September 2024, the 10-year Treasury yield rose to 4.79%, the opposite of the expected direction.
• Kansas City Fed research shows a 1% increase in debt-to-GDP raises the long-run real term premium by 1.0 basis point and the neutral rate by 0.6 basis points
• Net interest on the federal debt hit $970 billion in fiscal 2025, crossing $1 trillion in fiscal 2026
• Average credit card APR stands at 19.57% and total U.S. credit card debt has reached $1.28 trillion

Washington has been running deficits for so long that the national debt feels abstract to most Americans. It is not abstract anymore. Federal debt held by the public now stands at 100% of GDP, near its World War II peak, and the Congressional Budget Office projects it will reach 120% of GDP by 2036. To fund that debt, the Treasury must issue an ever-growing volume of bonds. More supply means lower prices and higher yields, and that dynamic is now embedding itself into every borrowing cost ordinary Americans face.

This is not a market fluctuation. It is a structural repricing of the cost of money, driven by fiscal arithmetic that the Kansas City Fed's research team has now quantified in detail, and its effects run from the federal budget directly through to household credit card statements.

When the Fed Cuts and Yields Rise Anyway

When the Federal Reserve cut its benchmark rate by 50 basis points in September 2024, the conventional expectation was that long-term yields would fall alongside it. Instead, the 10-year Treasury yield rose from 3.65% on the day of the cut to a peak of 4.79% by January 13, 2025. By that date, the 10-year term premium had reached its highest level since 2011, surpassing 0.8%. Yields were rising not because the Fed was tightening, but because bond investors were demanding more compensation to hold long-duration U.S. debt.

The Kansas City Fed's February 2026 research bulletin explains exactly why. Economists Bi, Phillot, and Zubairy found that higher Treasury supply puts upward pressure on both the term premium and the long-run neutral rate. During periods of high debt growth, a supply shock that increases the debt-to-GDP ratio by just 1% raises the five-to-ten-year-ahead real term premium by 1.0 basis point, the long-run real short rate by 0.6 basis points, and inflation expectations and the inflation risk premium each by 0.3 basis points. Those increments compound fast when debt is growing by trillions annually.

Fed cuts rates but yields and term premium both surge. Created via Gemini.

The 30-year Treasury yield recently climbed to 5.19%, its highest level since 2007. That number matters because long-term Treasury yields are the reference rate from which lenders price virtually every loan product in the American economy.

What Higher Yields Do to Household Budgets

The federal government is not the only borrower drowning in this environment. Households are too. With 30-year fixed mortgage rates currently sitting at 6.72%, up three-quarters of a percentage point from pre-war levels, the monthly cost of buying a home has moved well beyond what most budgets can absorb. According to the Committee for a Responsible Federal Budget, a 55 basis point increase in mortgage rates raises monthly payments on a $500,000 30-year mortgage by nearly $200 and adds $64,000 to its lifetime cost.

Mortgage, card, and debt costs hit household budgets hard. Created via Gemini.

Credit card debt has hit $1.28 trillion in 2026, with average APRs at 19.57%. More than 55% of American adults now use cards to cover basic necessities including groceries, utilities, and rent. These are borrowers with no margin for a sustained high-rate environment, and there is no near-term rate relief visible on the horizon.

A Fiscal Snowball with No Off Ramp

Net interest payments on the federal debt reached $970 billion in fiscal 2025, already eclipsing 3.2% of GDP and surpassing the previous post-World War II record set in 1991. The CBO projects those payments will cross $1 trillion in fiscal 2026 and reach $2.1 trillion by 2036, totaling $16.2 trillion over the decade. On a per-household basis, interest costs will grow from $7,900 today to $17,000 by 2036, and interest will become the second-largest line item in the federal budget next year, surpassing defense, Medicare, and Medicaid individually.

Every 0.5 percentage point rise in Treasury borrowing costs adds approximately $2 trillion in additional debt expense over the next decade. With $26 trillion in new borrowing projected through 2036 and a $7.6 trillion refinancing wall already underway, the compounding effect of yield increases is not incremental. It is exponential.

Wrap Up

Households that hold a mortgage, carry a credit card balance, finance a car, or own a small business dependent on commercial lending are already paying the price of Washington's fiscal expansion. That price will keep rising as long as Treasury supply continues to grow faster than demand.

The Kansas City Fed's research makes the mechanism plain: more debt means higher term premiums, higher neutral rates, and a permanently elevated cost of borrowing for every American household.