A few weeks ago, we discussed the ongoing ‘rates debate’ in terms of whether the new Federal Reserve Chair Kevin Warsh would place greater weight on market signals when setting the federal funds rate.

Whether the fed hikes once or twice really isn’t that big of a deal in our view, and we think that’s sort of already baked in, at least for 2026.

Even if Warsh decides to listen to the market more, he may still find himself in a bit of a pickle. The Fed sets short-term rates, while the bond market determines long-term Treasury yields. That leaves the new Fed chair with a difficult balancing act: market signals may call for tighter policy, while already-elevated long-term Treasury yields are increasing the US’s borrowing costs and tightening financial conditions across the economy.

The US 30-year Treasury yield recently ticked just south of 5.2%, hitting its highest level since the summer of 2007.² By historical standards, 5.2% isn’t that high, so that’s not really the pickle. The pickle resides in the sheer size of the US federal debt as well as the interest burden that massive debt produces.

The last time the 30-year Treasury yield was at this level, in 2007, total US debt outstanding was pushing toward $9 trillion, with a “t”.³ Today, in July 2026, it’s nearly $40 trillion, also with a “t”. These are astronomical numbers. As interest rates rise and the US national debt grows, annual interest payments on the debt have climbed above $1.1 trillion, more than three times their 2007 level, and surpassed Medicare as the US’s second-largest expense.⁴ For context, US net interest expense is so large that, if measured as GDP, it would rank among the world’s 20 largest economies.⁵

America’s Trillion-Dollar Tab

Treasury yields sit at the core of the financial system. They influence mortgage rates, corporate borrowing costs, commercial real estate financing, and the valuations investors place on stocks and bonds.

America’s soaring debt is turning interest rates into more than a Fed policy question. It’s becoming a potential market flashpoint. As Treasury borrowing costs grow and long-term yields rise, every rate decision carries larger implications for federal finances, inflation, the dollar, and equity markets. Higher rates increase the cost of capital, pressure valuations, and tighten financial conditions for investors.

Since the US president called himself the “king of debt” and said that “no one knows debt better than me,” he may want to share that knowledge with both the fed chair and the treasury secretary, because listening to the market while navigating higher rates may not make for the smoothest start to the new fed chair’s term.

Until next time.

END NOTES

¹Nelson, Louis. “Trump: ‘I’m The King of Debt’.” Politico. 22 June 2016.

²“Market Yield on U.S. Treasury Securities at 30-Year Constant Maturity, Quoted on an Investment Basis.” FRED. 23 July 2026.

³“Federal Debt: Total Public Debt.” FRED. 18 June 2026.

⁴“How Much Has the U.S. Government Spent This Year?” US Treasury Fiscal Data. 30 June 2026.

⁵“Gross Domestic Product (GDP), 2025.” Our World in Data. 14 July 2026.

DEFINITIONS

Gross Domestic Product (GDP) is the total monetary value of all goods and services produced within a country’s borders over a specific period (usually a year or quarter). GDP is the broadest measure of a country’s economic activity and is widely used to compare the size and growth of economies.

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