The world is getting more uptight about lending money to President Donald Trump’s government — causing interest rates to climb in ways that are worsening affordability pressures, hampering economic growth and creating a new risk for Republicans in November’s midterm elections.
The rise in energy prices following the Iran war has fed into bond markets that help finance the US government. Yields on 10-year US Treasury notes have climbed above 4.44%, up from 3.95% before the conflict began in late February. Mortgage rates have risen to their highest level in nine months, while auto sales have weakened.
The trend is not limited to the United States. Borrowing costs have increased in several countries as investors adjust to the prospect of higher inflation, concerns over government debt sustainability and growing investment in artificial intelligence.
Trump has said his administration has a plan to reduce the roughly $1.8 trillion (€1.5trn) annual budget deficit. He has pointed to tariff revenues, payments linked to the proposed “Gold Card” visa programme, spending cuts introduced by the Department of Government Efficiency and stronger economic growth. Last week, he said a fraud task force led by Vice President JD Vance could help generate significant savings.
“If he does really great, we’ll have a balanced budget without having to do anything,” Trump said.
Economists question deficit-reduction plans
Economists find it unrealistic that the administration’s measures will significantly reduce the deficit.
The cost of servicing US government debt has risen sharply since 2021 to more than $1 trillion (€860bn) a year, according to Jessica Riedl, a budget and tax fellow at the Brookings Institution.
“President Trump signed a tax cut bill that will likely add $5 trillion (€4.3trn) to 10-year deficits — and tariffs are offsetting only a small fraction of those costs,” she said. “Budget deficits are still projected to soar past $4tr (€3.4trn) annually within a decade under current policies.”
Budget deficits are expected to increase over the next decade as spending on Social Security and Medicare continues to outpace tax revenues.
The yield on the 10-year Treasury note rose as high as 4.67% in mid-May before easing as ceasefire negotiations involving Iran progressed. Treasury yields had also risen earlier in 2025 following Trump’s “Liberation Day” tariff announcements before declining when the administration scaled back some of the proposed increases.
Kent Smetters, faculty director of the Penn Wharton Budget Model, said his analysis of rising 30-year Treasury yields suggested that around 60% of the increase reflected expectations of continued high US government borrowing, while the remaining 40% was linked to inflationary pressures associated with the conflict involving Iran and US tariffs.
Glenn Hubbard, who chaired the White House Council of Economic Advisers under President George W. Bush and is now a professor at Columbia Business School, said he was concerned that the US may no longer have the same borrowing capacity as before to effectively combat an economic crisis, such as the 2008 crash or the coronavirus pandemic.
“I don’t think we have the space that we had in 2008 or 2020 to deal with it,” Hubbard said. “Washington doesn’t seem to be full of ideas — good or bad — to solve it.”
Interest rates are a concern for voters
Rising interest rates have become part of the debate ahead of November’s midterm elections, as concerns over the cost of living remain a key issue for voters.
In Colorado’s 5th Congressional District, Democratic candidate Jessica Killin has argued that persistent deficits and higher interest rates make it more difficult for households to buy or renovate homes, purchase vehicles, and manage credit card debt.
“Things are already expensive,” said Killin, an Army veteran and former aide to Doug Emhoff, husband of former Vice President Kamala Harris. “We can already talk about gas, but the cost of borrowing only makes that worse.”
Joe Reagan, another Democratic candidate seeking his party’s nomination, said fiscal policy featured prominently in his campaign.
“Every dollar spent paying interest is a dollar that isn’t being invested in infrastructure, education, veterans’ services, or economic growth,” Reagan said.
Both candidates are challenging Republican Representative Jeff Crank in a district viewed by Democrats as a potential electoral gain. Crank did not respond to AP’s requests for comment.
In his March 2025 address to Congress, Trump declared that “in the near future, I want to do what has not been done in 24 years: balance the federal budget. We’re going to balance it.”
Administration points to fraud reduction efforts
The administration says it intends to continue reducing budget deficits. As a share of economic output, the deficit was lower last year than in 2024, although that decline partly reflected tariff revenues that may be subject to refunds following a Supreme Court ruling that found the tariffs unlawful.
Treasury Secretary Scott Bessent cited a report last week suggesting that as much as $500bn (€429bn) in fraudulent government spending could be eliminated annually.
“So that would reduce the deficit substantially,” Bessent said.
His remarks appeared to reference a 2024 report by the Government Accountability Office, which estimated annual fraudulent spending of between $233bn (€205bn) and $521bn (€458bn). However, those estimates included years affected by pandemic-related emergency spending programmes.
The White House and Treasury Department did not respond to AP’s requests for clarification regarding the basis for Bessent’s estimates.
Bessent has argued that the administration inherited an unusually large budget deficit from former President Joe Biden.
“We inherited the worst budget deficit in history — in history — when we were not in a recession or not at war,” Bessent told reporters at the White House.
He has previously said the administration aims to reduce the annual deficit to 3% of gross domestic product. The deficit currently stands at roughly twice that level, and Bessent has not specified when the target could be achieved.
Investors continue to buy shares in US companies, helping support stock market gains and signalling confidence in the country’s long-term economic prospects. However, higher borrowing costs also indicate concerns among investors about the scale of US government debt.
Several economists said financial markets may ultimately exert more pressure for fiscal reform than voters themselves.
Hubbard said confidence remains the foundation of sovereign borrowing.
“That is what debt is about: I believe you will pay me back,” he said. “That works until it doesn’t.”
