Fiscal 2026 U.S. interest costs hit $1.36 trillion amid debt fears

By Amara Osei

U.S. gross interest costs reached $1.36 trillion in fiscal 2026. Net interest costs amount to about $2.9 billion a day, and the Peter G. Peterson Foundation estimates they equal 3.2% of GDP, breaking a record set in 1991.

The Treasury Department’s final fiscal 2026 tally, released last month, put the federal deficit at $1.99 trillion, 12% wider than the $1.78 trillion gap in fiscal 2025. Revenue rose 3% to $5.4 trillion, while spending increased 6% to $7.4 trillion. Social Security and Medicare were the largest line items; net interest ranked third, above defense and Medicaid.

What did the market selloff test?

Robin Brooks, a Brookings Institution senior fellow, used his Saturday Substack post to call last week’s brutal stock selloff a natural experiment for competing explanations of rising Treasury yields.

He framed the choice as a rising fiscal risk premium as public debt grows out of control, versus hyperscaler issuance with no sign of fiscal-policy trouble, and chose the first.

Brooks said corporate borrowing remains far below the levels of the early-2000s IT bubble, while public borrowing is historically high and more likely to be pushing yields higher. He also cited the latest monthly jobs report, which showed payrolls growing by more than double the consensus estimate.

The two-year yield rose more than hot economic growth could explain, compared with previous upside job surprises. Brooks said that reaction weakens two arguments: that U.S. growth depends on AI, and that AI is responsible for higher yields.

His test was the market-implied yield on a 10-year Treasury security due in 10 years, known as the 10y10y forward yield. It measures the premium investors demand for holding long-term Treasuries, including risks from the trajectory of federal debt and deficits.

If an AI bubble were driving long-term yields, Brooks said, that forward measure would have fallen alongside the 10-year and two-year yields. But that did not happen. He said the failure further cemented the fiscal risk premium case.

“The midterm elections and the AI sell-off that’s ensued have given us the perfect natural experiment to disentangle what’s going on with long-term yields. They’re up because of mounting fiscal stress, not because of AI.” — Robin Brooks, senior fellow, Brookings Institution

His conclusion moves the forward-looking question from corporate bond supply to Washington’s fiscal choices: investors are charging a higher risk premium for a $40 trillion debt load and a budget deficit approaching $2 trillion.

Takeaway: The selloff points to concern about public finances, not merely a flood of AI-related corporate bonds.

What pushed Treasury yields higher?

The 10-year yield has eased in recent weeks as investors sought shelter in Treasuries. Before that retreat, it climbed more than 100 basis points, topped 5% and reached its highest level in 24 years.

The run-up followed the start of the Iran war in late February, which lifted oil prices and revived expectations that the Federal Reserve would hike rates to contain resurgent inflation. Hyperscalers also flooded the bond market with debt to fund heavy capital spending and AI infrastructure, helping keep the U.S. economy hot and inflation sticky.

Some Wall Street observers said this AI issuance crowded out U.S. bonds and forced Treasury to offer higher returns at auctions. That supply competed for investors’ dollars as the government financed a $2 trillion budget deficit and paid interest on $40 trillion of debt.

Takeaway: The recent easing reflects a return to safety after a rise shaped by inflation, rate and supply pressures.

How much is debt service costing?

Net interest payments rose 8% to $1.05 trillion in fiscal 2026, outpacing increases in total spending, revenue and GDP. The increase also exceeded real GDP growth of about 2% and nominal GDP growth of about 6%.

The 3.53% average interest rate on gross costs was more than double the 2021 rate, just before the Federal Reserve embarked on aggressive tightening to rein in inflation.

Takeaway: Interest costs grew faster than revenue, spending and GDP, leaving Washington with less room for easy fixes.

What is Washington being pressed to do?

Maya MacGuineas, president of the Committee for a Responsible Federal Budget, warned in September:

“Higher interest begets more debt, and greater debt begets higher rates and higher interest. Eventually, the whole thing could come crashing down.

“That’s why Washington needs a fiscal intervention now, before it’s too late. The President, the Treasury Secretary, and Congressional leadership need to understand the severity of this issue. There are no easy fixes, and we can’t just wish this problem away.”

Takeaway: MacGuineas’s warning is a feedback loop: more debt raises interest costs, which can require still more borrowing.