The US has decided to add more debt to an already overloaded balance-sheet with the passage of Donald Trump’s “One Big Beautiful Bill Act”.
The federal debt is now $37 trillion. Interest payments will soon surpass $1 trillion per annum. This is more than the US defense budget.
Bond markets are strangely calm. Yields are increasing, but investors are not panicking. Investors may not have fully understood what’s to come.
It’s no longer just about abstract fiscal debates or theoretical debt ceilings. The numbers are clear, the risks are increasing, and the market is not reacting to reality.
How much damage is there?
According to the Congressional Budget Office (CBO), the new bill will add a minimum of $3.4 trillion to deficit over the next decade. Other estimates go even further.
The Committee for a Responsible Federal Budget, (CRFB), puts the number closer at $4 trillion. A longer-term range would be $15 to $30 trillion if tax cuts included in the bill were made permanent.
This is on top of a debt load that has already reached 124% of GDP (up from 104% in 2017).
The US hasn’t experienced debt levels this high since World War II. Back then, the US had a high post-war economic growth, a growing labor force, as well as fewer structural liabilities.
Today, the situation is different. The US population is ageing. The amount of money spent on entitlements is increasing. The cost of servicing debt is increasing, not decreasing.
Why aren’t the bond markets screaming?
Investors are starting to respond, though only slowly. In the second quarter 2025, long term bond funds saw an outflow of $11 billion, the highest pace since the COVID crisis in 2020.
In the meantime, $39 billion was invested in short-term bonds, a clear move towards safety.
The bond market as a whole hasn’t priced in all the risks. The 10-year Treasury yield is up, but only modestly.
The Fed will intervene, if the situation worsens. This assumption is now questioned.
The Fed does not have the same flexibility as it did in the past. In the 2008 financial crises, quantitative easing suppressed returns.
During World War II the yield curve control helped finance expenditure without sparking inflation. Neither strategy is easily repeatable today.
Inflation remains above target. Interest rates are already between 4% and 5%. Reintroducing yield suppression could trigger a new inflation cycle. The Fed is caught in a dilemma between the need to maintain stability and rising debt costs.
It’s not just fiscal risk. It’s not just fiscal.
The lack of political will to change course is what makes this moment unique. Theoretically, fiscal consolidation is possible. In practice, it is not a priority.
The OBBBA is centered around a massive tax cut. The majority of benefits are given to the richest Americans.
Even with cuts to Medicaid and energy programs, the revenue loss cannot be offset. The bill assumes that future spending cuts will kick-in, but history suggests otherwise. Tax cuts that were initially temporary often become permanent. Future austerity measures are always postponed.
The administration defends this bill by claiming it will increase growth and reduce deficits. But the evidence is not strong.
According to research by Chodorow Reich and Zidar (2024) Trump’s 2017 tax cut slightly boosted investments, but offset only about 2% the revenue loss. There is no reason for better results to be expected this time.
Some economists suspect that the bill’s real goal is political. They want to achieve short-term gains by the midterm elections of 2026, win back high income donors, and distract the voters with culture-war messaging.
The strategy does not include long-term solvency.
What does this mean to investors?
The US has entered into a phase of structural debt. This means that borrowing is not tied to one-off events such as wars or recessions. It’s a part of the system.
If interest rates continue to rise, and GDP growth slows down, the government may need to borrow to pay only interest.
This is the beginning a spiral of debt. It is important for anyone who owns US assets. Stocks and US dollars are also important, not just bonds.
The demand for Treasuries from abroad is easing. The Fed is slowing down its balance sheet runoff but remains hesitant to expand.
Bond yields can spike if market confidence in US fiscal position is eroded, whether it’s due to inflation expectations or default risk.
Higher yields lead to lower stock values, tighter lending and a fall in investment. The scenario is similar to the early 1980s, but without Paul Volcker’s credibility or the same error margin.
The market is heavily based on the idea that rates will be dropping soon. This is not a guarantee.
No one knows the exact moment when the tipping points will occur. The logic is clear. Markets will eventually react if debt increases faster than GDP and interest costs increase faster than revenues.
The markets are calm. History shows that confidence can be eroded slowly and then suddenly. For now, the world continues to buy Treasuries.
Eventually, someone will ask if the US can pay its bill. If that question is asked loudly enough, then the answer will not come from press conferences. It will come down to yields.
This post The US debt crisis is underway. Markets haven’t priced in the debt spiral yet. This may change as new information is released.
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