Governments worldwide are becoming more selective about lending money to the U.S., leading to higher interest rates. This escalation intensifies affordability issues, hinders economic growth, and presents new risks for Republicans in the upcoming midterm elections.
The conflict with Iran has driven up energy prices, affecting U.S. government bonds that fund Donald Trump’s administration. U.S. 10-year Treasury bond rates have climbed to over 4.44%, from 3.95% before the war began in February. Mortgage rates reached their highest levels in nine months while car sales have plummeted.
This global challenge is heightened by increased interest rates in several countries due to inflation concerns, doubts about public debt sustainability, and dramatic investment in artificial intelligence. Trump has repeatedly assured Americans of his plans to reduce the annual budget deficit of approximately $1.8 trillion. He cited tariff income, foreign payments for ‘golden’ visas, spending cuts by the Department of Government Efficiency, and faster economic growth as solutions. Recently, Trump claimed that a fraud task group led by Vice President JD Vance would be crucial for significant savings.
“If it performs exceptionally well, we could balance the budget without intervention,” Trump stated.
However, economists believe such strategies are unlikely to achieve the promised deficit reduction.
The cost of servicing the national debt has tripled since 2021, exceeding $1 trillion annually, noted Jessica Riedl, a budget and tax researcher at the Brookings Institution.
“Trump’s tax cut legislation could add $5 trillion to deficits over ten years, with tariffs only offsetting a small portion of these costs,” Riedl explained.
Budget deficits are projected to surpass $4 trillion annually within a decade under current policies. Forecasts suggest deficits will grow, driven by Social Security and Medicare costs outstripping tax revenue.
The U.S. 10-year Treasury rate rose to 4.67% in mid-May before stabilizing as ceasefire negotiations with Iran proceeded. This pattern echoes the initial rate hikes in 2025 from Trump’s ‘Liberation Day’ tariffs, which subsided once Trump softened extreme increases.
Kent Smetters, academic director of the Penn Wharton Budget Model, attributed 60% of the rise in 30-year Treasury yields to expectations of disproportionate U.S. borrowing and 40% to inflation fueled by the Iran conflict and Trump’s tariffs.
Glenn Hubbard, former Chairman of the Council of Economic Advisers under George W. Bush, expressed concern over the U.S.’s diminished borrowing capacity to effectively confront economic crises, such as the 2008 crash or the coronavirus pandemic.
“We lack the leeway seen in 2008 or 2020 to address this,” said Hubbard, now a Columbia Business School professor. “Washington seems bereft of solutions—either good or bad.”
High interest rates have become a talking point for Democratic candidates in races determining control over the House and Senate, resonating with voters worried about soaring food and gas prices.
In Colorado’s 5th congressional district, Democrat Jessica Killin highlights how persistent deficits and rising rates complicate purchasing or renovating homes, financing new cars, or managing credit card debt.
“Things are already expensive,” noted Killin, an Army veteran who was a senior advisor to Doug Emhoff, the former Second Gentleman. “We can discuss gas prices, but borrowing costs exacerbate everyone’s financial strain.”
Joe Reagan, also a veteran pursuing the Democratic candidacy, emphasizes fiscal responsibility in his campaign communications.
“Every dollar on interest payments is a dollar not invested in infrastructure, education, veteran services, or economic growth,” Reagan stated.
Both aim to challenge Republican incumbent Jeff Crank in a district their party eyes as a potential gain.
In a March 2025 speech to Congress, Trump vowed, “Soon, I want to accomplish what hasn’t been done in 24 years: balance the federal budget. We will balance it.”
Crank did not respond to requests for comment.
Fraud reduction emerges as a new deficit strategy. The government promises steady deficit reduction, although last year’s deficit shrank partly due to rebated tariff revenues after the Supreme Court judged them illegal.
Last week, Treasury Secretary Scott Bessent cited a report indicating potential elimination of up to $500 billion in annual fraudulent public spending, claiming this could significantly curtail the deficit.
Bessent derived his conclusion from a 2024 Government Accountability Office report estimating $233 billion to $521 billion annually in fraudulent expenditures, albeit partly during the pandemic period when the government accrued significant debt to stabilize the economy.
Neither the White House nor Treasury responded to queries on Bessent’s assertions.
Discussing deficits, Bessent told White House reporters that the administration inherited a particularly challenging deficit situation from former President Joe Biden, a Democrat.
“We inherited the worst budget deficit ever—ever—without a recession or war,” Bessent claimed.
Bessent previously announced plans to reduce the annual deficit to 3% of the nation’s GDP. Currently, the deficit approximates double that percentage, with no direct response from Bessent on the timeline for achieving the goal.
Despite this, investors continue purchasing U.S. company stocks, boosting the stock market’s value as an indicator of economic potential. Yet, rising interest rates suggest investors view national debt as a vulnerability.
Financial markets might exert enough pressure through heightened rates to compel political leaders to confront systemic imbalances. Several economists expect market forces to address the deficit ahead of voters.
Hubbard emphasized that the bond market system depends on confidence in debt repayment. He explained that the term “credit” shares Latin roots with “credo,” meaning a belief system.
“Debt reflects belief in repayment,” Hubbard observed. “It works until it ceases to.”