Rising BondYields Signal Looming Fiscal Strain Ahead of Midterms

Washington (AP) — Global investors are increasingly wary of lending to the Trump administration, pushing borrowing costs higher and complicating economic growth prospects, while raising political risks for Republicans ahead of the November midterms.

The energy price surge triggered by the Iran conflict has seeped into bond markets that finance the U.S. government. Yields on 10‑year Treasury notes have risen to 4.44%, up from 3.95% before the war began in late February. Average mortgage rates have jumped to their highest level in nine months, and auto sales are beginning to falter.

The challenge is worldwide, as interest rates have climbed across multiple economies amid concerns about inflation, debt sustainability, and a sharp uptick in artificial‑intelligence‑driven investment.

Trump has sought to reassure Americans that he will curb the roughly $1.8 trillion annual budget deficit, citing revenue from tariffs, foreign payments for his “Gold Card” visa, spending cuts from the Department of Government Efficiency, and faster economic growth. Last week he said a fraud task force led by Vice President JD Vance would unlock substantial savings.

“If he succeeds spectacularly, we could achieve a balanced budget without any additional action,” Trump asserted.

Economists caution that this vision is unlikely to materialize.

Experts argue that Trump’s proposed measures are insufficient to meaningfully reduce the deficit.

The cost of servicing the national debt has tripled since 2021, exceeding $1 trillion annually, according to Brookings Institution fellow Jessica Riedl.

“President Trump signed a tax‑cut bill that could add $5 trillion to ten‑year deficits — and tariffs offset only a tiny fraction of those expenses,” she noted. “Even under current policies, deficits are projected to exceed $4 trillion per year within a decade.”

Over the next decade, Social Security and Medicare outlays are expected to outpace tax revenues, driving deficits higher.

The 10‑year Treasury yield peaked at 4.67% in mid‑May, easing slightly as Iran ceasefire talks progressed — mirroring the pattern seen in 2025 when “Liberation Day” tariffs initially spiked rates before Trump scaled back the most aggressive hikes.

When Kent Smetters, director of the Penn Wharton Budget Model, analyzed the rise in 30‑year Treasury yields, he estimated that 60% of the increase reflected expectations of continued U.S. oversized borrowing, while the remaining 40% stemmed from inflation driven by the Iran war and Trump’s tariffs.

Glenn Hubbard, former chair of the White House Council of Economic Advisers under George W. Bush and now a Columbia Business School professor, warns that the United States may have lost the borrowing capacity it once enjoyed to confront crises such as the 2008 crash or the pandemic.

“I don’t think we have the same flexibility in 2008 or 2020 to respond,” Hubbard said. “Washington seems short on ideas — good or bad — to solve the problem.”

Higher interest rates are becoming a voter issue.

Rising rates give Democratic candidates a fresh line of attack as constituents worry about costly food, gasoline and other everyday expenses.

In Colorado’s 5th congressional district, Democrat Jessica Killin is emphasizing how persistent deficits and higher borrowing costs make home purchases, renovations, car purchases and credit‑card debt more difficult.

“Things are already expensive,” Killin, an Army veteran and former aide to Doug Emhoff, said. “We’re already talking about gas, and higher borrowing costs only make it worse.”

Joe Reagan, another Army veteran seeking the Democratic nomination, pledged in an email to focus on “fiscal stewardship,” arguing that every dollar spent on interest is a dollar not invested in infrastructure, education, veterans’ services or economic growth.

Both are challenging Republican Rep. Jeff Crank in a district Republicans view as a potential pickup. Killin contends the deficit illustrates “Trump says one thing and does the opposite.”

During his March 2025 address to Congress, Trump promised to “balance the federal budget in the near future — something not done in 24 years.”

Crank did not respond to requests for comment.

Cutting fraud is now the administration’s new deficit strategy.

The White House argues that it will steadily shrink budget deficits, noting that the deficit as a share of the economy fell last year relative to 2024, a decline partially attributed to tariff revenues that are subject to refunds after the Supreme Court deemed them illegal.

Treasury Secretary Scott Bessent cited a report claiming up to $500 billion in annual fraudulent spending could be eliminated, “which would substantially reduce the deficit.”

Bessent’s estimate draws on a 2024 GAO analysis that placed fraudulent spending between $233 billion and $521 billion annually, figures that were inflated during the pandemic‑era borrowing surge.

The White House and Treasury did not answer questions about the source of Bessent’s claim.

Bessent told reporters that the administration inherited the worst budget deficit in history — despite not being in a recession or at war — blaming former President Joe Biden.

Bessent had previously announced that the administration would aim to reduce the annual deficit to 3% of GDP. It’s roughly double that percentage currently and Bessent did not directly answer a question about the timeline for hitting his target.

As of now, investors continue to buy shares in U.S. companies, causing the stock market to increase in value as a sign of confidence in America’s economic potential. But the rise in interest rates also suggests that investors view the national debt as a vulnerability for the U.S.

The financial markets might be able to inflict enough pain with higher rates to compel political leaders to address systemic imbalances. Multiple economists said they expect markets to force the deficit issue before voters do.

Hubbard emphasized that the whole bond‑market system rests on trust that the debt will be repaid. He noted that the word “credit” is linked to a Latin term that is also the root of the word “creed” about a system of beliefs.

“That is what debt is about: I believe you will pay me back,” Hubbard said. “That works until it doesn’t.”

Josh Boak, The Associated Press

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