Goldman Sachs has warned that rising US interest rates could make the country’s huge debt problem even worse. The investment bank said persistently high rates could increase the cost of servicing the US national debt and put more pressure on government finances.
Goldman Sachs strategist Pierfrancesco Mei said US debt-to-GDP could reach 132% by 2035 if interest rates stay higher for longer. That would be 10 percentage points above Goldman Sachs’ baseline forecast, according to a new note released Tuesday.
Higher rates could raise US debt costs
Higher interest rates would increase the amount of money the US government has to spend on interest payments. Goldman Sachs said interest expense as a share of GDP is an important measure because it shows how much money is needed to service the country’s debt, according to Yahoo Finance.
Goldman Sachs warned that the higher debt burden could force the US to reduce its budget deficit sooner than expected. The bank said deficit reduction may become necessary to stop the debt-to-GDP ratio from rising further.
US Treasury yields are rising
US Treasury yields have risen sharply this year, increasing the government’s borrowing costs. The benchmark 10-year Treasury yield has climbed by more than 115 basis points, from around 4.10% late last year to about 5.28% currently, according to Yahoo Finance.
The 10-year Treasury yield is now at its highest level in about 24 years. The sharp rise in yields means the US government faces higher costs when it borrows money and refinances existing debt.
Inflation puts pressure on bond market
The bond market sell-off has been linked to rising inflation. Yahoo Finance reported that inflation pressures were fueled by the US war on Iran, which prompted the Federal Reserve to raise interest rates last month.
A strong US economy has also added to pressure in the bond market. The economy has remained resilient despite higher prices, contributing to concerns that interest rates could stay elevated.
US interest bill hits record
The rise in borrowing costs comes at a difficult time for the US because its annual interest bill is already at a record level. Bond investment firm DoubleLine said annual US interest expense has reached 18.5% of federal government revenue, according to Yahoo Finance.
That 18.5% figure is higher than the previous record of 18.4%, set in 1991. The latest figure shows how much more of the government’s revenue is now being used to pay interest on existing debt, according to DoubleLine’s analysis.
US debt interest reaches $1.25 trillion
US annual interest expense has more than quadrupled in just four years. It has now reached a record $1.25 trillion, which is more than four times the amount recorded in 1991.
The growing interest bill means a large part of US government revenue is going toward debt payments instead of other priorities. Nearly $1 out of every $5 collected by the federal government is now being used to service existing national debt.
Debt costs could affect government spending
That money could otherwise be used for areas such as defense, infrastructure and social programs. The report said higher debt-service costs can reduce the amount of money available for productive investments and safety-net programs such as Social Security, according to Yahoo Finance.
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The pressure could become worse if debt-service costs continue to rise. Mandatory spending and interest payments can take up more of the federal budget, leaving less room for discretionary government spending.
Higher interest could create more debt
Higher interest costs can also create a debt cycle. If the government has to borrow more money just to cover its interest payments, it can increase the total debt and create even higher interest costs in the future.
The growing debt burden could also limit the government’s ability to respond to future economic downturns. A government with a heavier interest burden has less flexibility to use new fiscal stimulus during a recession.
David Rubenstein warns about US debt
Billionaire David Rubenstein also warned about the size of the US debt. The Carlyle Group co-founder said the US now has about $40 trillion in debt during a new episode of Yahoo Finance’s Power Players with Brian Sozzi podcast.
Rubenstein said history shows that a country’s financial position can become a concern when interest payments become larger than national-security spending. He said the US has now crossed that threshold.
US debt could hit 132% of GDP
The combined warnings point to a bigger problem for the US: higher interest rates are making an already-large debt pile more expensive to maintain. Goldman Sachs’ forecast suggests that if rates remain high, the US debt-to-GDP ratio could rise to 132% by 2035, increasing pressure for the government to take steps to reduce its deficit.
The key concern is not only how much debt the US has, but how much it costs to service that debt. With Treasury yields near multi-decade highs and annual interest costs already at a record $1.25 trillion, prolonged higher rates could put further pressure on US government finances.