US government debt broke $40 trillion for the first time, surged by one-third in less than five years, and the risk of a “vicious cycle” of finance intensified

The Zhitong Finance App learned that the size of the US federal government's debt exceeded 40 trillion US dollars for the first time, increasing by about one-third in less than five years. Meanwhile, long-term US bond yields have remained high for many years, and interest expenses have increased rapidly, making the market more concerned about US fiscal sustainability and the risk of mutual increases in debt and financing costs.

According to data released by the US Treasury Department on Wednesday, the total outstanding public debt of the US reached 40.05 trillion US dollars as of Tuesday's close. In contrast, the size of US debt did not exceed 30 trillion US dollars for the first time until January 2022, which means that in just about four and a half years, the US government debt increased by more than 10 trillion US dollars.

At a time when the $40 trillion mark has been breached, the US Treasury is trying to ease the pressure brought about by rising long-term financing costs. Treasury Secretary Bezent announced on Wednesday the further expansion of the long-term US Treasury repurchase program to improve the liquidity of the long-term bond market. After the news was announced, the price of US bonds rose, and long-term yields declined markedly.

However, the market believes that compared to the 40 trillion US dollar integer mark itself, what is more noteworthy is the US government's rising debt financing costs. Matthew Luzzetti, US chief economist at Deutsche Bank, said that breaking through $40 trillion may re-draw the market's attention to fiscal issues in the short term, but this figure itself is not a special tipping point that determines debt trends; previous fiscal predictions have already predicted that debt will reach this scale.

The real problem is that the continued rise in US Treasury yields is significantly increasing the government's debt repayment burden. The 30-year treasury auction held by the US Treasury last week recorded the highest financing cost in about 25 years, and the 10-year US bond auction held the day before also rose to the highest level since 2007.

Treasury interest expenses continue to rise as investors demand higher yields on US government bonds. Up to now, the US government's interest costs for the 2026 fiscal year have reached 1.17 trillion US dollars, an increase of 15% over the same period last year. Interest expenses have now become the third largest item of expenditure in the US federal budget, after health-related expenses and social security.

This has also caused the market to worry that the US treasury may fall into the so-called “vicious cycle of debt,” that is, the larger the size of government debt, the more interest needs to be paid; the expansion of interest expenses will further drive up fiscal deficits and demand for borrowing, while the increasing supply of bonds may also prompt investors to demand higher yields and eventually further raise financing costs.

US public debt includes not only tradable US Treasury bonds held by market investors, but also internal government debt, such as debt formed by investing past surpluses of the social security system into specially issued treasury bonds.

In recent years, the US fiscal deficit has remained at an all-time high for a long time. During the global financial crisis and COVID-19, the size of US debt expanded markedly as taxes fell due to the economic recession and a surge in government bailouts and fiscal stimulus spending. In addition to this, tax cuts, war spending, and large-scale fiscal stimulus policies implemented by various administrations in the past have further increased the debt burden.

According to data compiled by Deutsche Bank economists, the tax cuts implemented by the George W. Bush administration in the early 2000s are expected to reduce cumulative fiscal revenue by about 3.3 trillion US dollars up to the mid-2010s; the tax cuts passed by the Trump administration in 2017 are expected to reduce fiscal revenue by at least 1.5 trillion US dollars in the first ten years.

In terms of expenditure, the war between Iraq and Afghanistan had a cumulative cost of more than 1.6 trillion US dollars by the mid-2010s. The “American Rescue Plan” launched by the Biden administration in 2021 is expected to increase the fiscal deficit by about 1.8 trillion to 1.9 trillion US dollars within 10 years, and related interest costs have not been included.

When he took office in 2025, Bezent proposed that he hoped to reduce the US fiscal deficit to about 3% of GDP before the end of Trump's second term. However, as of July of this year, this ratio is still around 6%, and the market is still skeptical about whether the US fiscal situation can improve substantially in the next few years.

Political resistance has also made it more difficult to cut the deficit. The Republican Party has long opposed increasing government revenue through tax increases, while both the Democratic Party and the Republican Party are cautious about cutting politically sensitive spending such as health care and retirement benefits. Meanwhile, Trump is considering proposing new tax cuts and increasing defense spending before November's midterm elections.

The rapid increase in the size of debt also means that the US is approaching the risk of a new debt ceiling. Currently, the upper limit of US legal debt is 41.1 trillion US dollars, leaving only about 1 trillion US dollars of space between the current debt size. Fitch anticipates that the US may hit this ceiling in mid-2027, when Washington may once again engage in a political game over raising the debt ceiling.

Fitch confirmed America's AA+ sovereign credit rating on August 13, but at the same time warned that the US government has yet to take substantial measures to resolve the huge fiscal deficit. As the population ages, government spending pressure will rise further over the next decade, and rising debt levels will also make the US economy more vulnerable to future shocks.

Michael Peterson, chairman of the Peter G. Peterson Foundation, said that breaking through the $40 trillion mark should be a “wake-up call” for Washington. If the US is unable to control debt growth, continued large-scale borrowing will put upward pressure on interest rates and eventually lead to financing costs such as residential housing loans, car loans, and credit cards.