“There’s no such thing as a free lunch.”
That’s according to BofA Global Research after tallying up the rising costs of America’s debt.
“Clients are concerned about U.S. fiscal deficit risks. We are too,” wrote the team of strategists led by Meghan Swiber.
The federal deficit itself hasn’t changed much, closing the fiscal year 2026 at US$1.99 trillion or 6.2 per cent of gross domestic product, they said. That’s in line with consensus, but a fair ways from the White House’s goal of three per cent.
It’s the interest on the nation’s debt that’s the real killer.
America’s annual interest bill has more than doubled since 2021 to more than US$1.2 trillion, and rising yields will only raise those costs.
With 10-year Treasury yields currently 100 basis points higher than the Congressional Budget Office’s (CBO) February baseline, BofA calculates that interest costs could rise by roughly $4 trillion over the next 10 years. And every 100bp the Federal Reserve hikes adds another US$95 billion a year.
“Even if primary deficits remain largely unchanged, the growing interest burden materially increases the government’s financing needs,” said the strategists.
A classic trigger of a debt spiral is when interest rates on debt exceed an economy’s nominal growth, and according to the BofA team that could occur as early as 2028.
“At today’s interest rate levels, r could surpass g in just a few years. That makes the fiscal backdrop much worse than the CBO expected in February.”
So far nominal growth, supported by inflation and the surge in artificial intelligence investment, is running well above 4 per cent, but the strategists say both of these forces could be temporary unless AI adoption delivers substantial productivity gains.
If that happens, worries about fiscal sustainability would ease, “even so, we believe it is optimistic to assume the United States can simply grow its way out of its mounting debt burden,” they said.
At the same time as AI demands more capital, the global savings glut appears to be diminishing, said the strategists. As debt-to-GDP climbs even higher, investors will demand higher compensation for holding Treasury securities.
“Together, these forces suggest that fiscal deficits could become a more important driver of higher-for-longer interest rates than they have been in the past,” they said.
The United States Treasury can use bills and buybacks to reduce costs, but both would depend on a favourable yield curve.
The bottom line, according to the strategists, is that higher interest rates are turning the U.S. deficit into a bigger financing problem.
“As elevated yields feed through to the debt stock, interest expense compounds, financing needs rise and the fiscal trajectory becomes less sustainable,” they said.
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Owning a car in Canada is getting more expensive.
Since 2021, the costs of buying and driving a vehicle have risen sharply, with gasoline climbing 56 per cent, repairs 28 per cent, insurance 24 per cent and purchases 18 per cent, said Sal Guatieri, a senior economist at BMO Capital Markets.
Buying the actual car was the only expense that has moderated in this past year, rising just 2.1 per cent while fuel shot up almost 28 per cent and insurance rose 5 per cent.
The costs of public transport, on the other hand, have risen much more slowly, he said. Since 2021, taxi fares are up 8 per cent and bus and subway fares just 4 per cent. All of these have declined in the past year.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.
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Posthaste: America risks 'debt spiral' by 2028 as interest rates rise
2026-10-26 11:58:33
