Ten-year Treasury yield tops 5% as federal interest costs pass a trillion dollars

The 10-year Treasury yield has topped 5% for the second time in almost 20 years^6,8,9. It did so ahead of the Federal Open Market Committee meeting⁴. Shorter maturities are moving with it: two-year and three-year yields have spiked toward 5% while the 10-year holds at 5%, leaving the yield curve bulging in the middle^6,7.

The fiscal arithmetic underneath has moved in the same direction. Annual federal interest payments surpassed $1.02 trillion in the current fiscal year, and are projected by the Congressional Budget Office to reach $2.1 trillion by 2036³. The federal government recorded a budget deficit of nearly $167 billion in August alone, taking the shortfall for the fiscal year to $1.97 trillion with one month still to run¹. The national debt has passed $40 trillion, with spending on debt interest rising by 14% annually².

Why it matters to investors

The relationship between the two halves is the story. Since 2020, federal debt is up nearly 50%, but interest payments are up over 200%⁵, because the stock is being refinanced at rates far above the ones it was issued at. That refinancing wall has been put at $9.5 trillion⁵.

Deficit hawks warn about a self-reinforcing debt spiral in which larger interest payments force more borrowing⁴. Whether or not that spiral materialises, the mechanical effect on portfolios is immediate: a risk-free rate at 5%^6,7 resets the discount rate applied to every other asset, and raises the bar that equity and credit returns must clear.

Treasury has not been passive. To alleviate market worries, Treasury Secretary Scott Bessent has implemented buybacks of long-dated Treasuries⁹. The market’s attention has correspondingly shifted onto the Treasury market, the Federal Reserve, Kevin Warsh and Bessent himself⁸.

What to watch

The shape of the curve is the near-term tell. Two-year and three-year yields rising toward a 10-year that is holding at 5%^6,7 is a different signal from a parallel shift, and it bears on where duration risk is being repriced.

The second is supply. With the fiscal-year deficit already at $1.97 trillion¹ and interest costs compounding at 14% a year², the volume of issuance meeting that 5% yield is the variable that decides whether the buyback programme⁹ is enough to steady the long end.