As if snoozing like Rip Van Winkle, intoxicated for years by a seemingly limitless capacity to borrow and spend, the public has largely ignored, and Congress has specifically left unaddressed, the swelling U.S. Federal debt. But the recent passage of massive spending bills, coupled with sharply higher interest rates over the past couple of years, has awakened many to the perils of the increasing demands of servicing the now gargantuan $36+Trillion Federal debt. As the chart below shows, the U.S. Treasury in 2025 faces the need to refinance roughly $7 Trillion of debt, including new debt required to finance an ongoing budget deficit estimated at nearly $2 Trillion by the Congressional Budget Office. Debt service now exceeds the Defense budget to rank as the 2nd largest government expenditure after required Medicare and Social Security obligations.
Why is getting the growth of debt under control of primary importance? Aside from competing directly with private sector borrowers, if the ability of a borrower to repay or refinance their debt comes into question, lenders will demand even higher rates. Worse yet, they may refuse to lend further, potentially leading the borrower to default. The simple corollary is an overextended consumer or business that must apply more of their cash flow towards servicing their debt-load, resorting to borrowing even more to cover those payments. At some point, that’s unsustainable. Governments are not immune to that reality as well.
What isn’t differentiated in this chart is the amount of maturing debt that is of older issuance having higher interest rates versus newer, near zero rate (primarily covid era) debt that must be refinanced at today’s higher interest rates. Thus the “maturity bulge” will continue to shift to the right and continue expanding as both debt levels and financing costs continue to rise. The immediate, pressing challenge is to first stop the growth of new debt. Only then can ways be found to begin to pay it down thereby lowering servicing costs (unless interest rates shoot higher). Both are difficult, daunting challenges to address.
What are some possible starting options to consider? We posit the following:
- Start extending the maturities of debt being refinanced to buy time to find ways to reduce overall debt. The U.S. should consider issuing 50 or 100 year debt as has been done by countries such as Mexico, Denmark, Sweden, Ireland and China. Even Argentina was able to issue 100 year debt in 2017 despite having previously defaulted on 8 occasions (default #9 occurred in 2020). As the chart above shows, outstanding longer-term debt extending to the current legal limit of 30 years is minimal, and broadly stretched out, compared to levels of short-term debt. Yes, somewhat higher longer term rates would be needed to attract buyers. Conceptually, it’s similar to a consumer taking out a 30 year vs 15 year home loan or a longer vs shorter term vehicle loan.
- Issue more longer-term zero-coupon debt, say 10 years or even longer, if the market would take it. Pair it off with comparable longer maturity coupon paying debt to lower overall cash flow demands and the need to continually issue new debt to cover what’s coming due.
Entities having longer term actuarial needs such as pensions or insurance companies would be logical buyers of such issues, as well as foreign governments which already hold much of U.S. debt. To protect against a possible scenario where rates fall meaningfully from current levels (be careful of what you wish for!), perhaps an early call provision could be included allowing the Treasury to “call-in” some issues to re-finance at lower rates, just as what a homeowner might do if mortgage rates fell. Most current longer-dated bank CD offerings have this provision as do many corporate bond issuances.
The above may be viewed as an overly simplistic starting approach given the complexity of the debt issue and its root causes. However, making progress on addressing the issue would go a long way to reassure the public and investors of the ability of the U.S. to continue to manage and service its financial obligations and remain willing buyers of its debt obligations.
Additional Resources: Debt Has Always Been the Ruin of Great Powers. Is the U.S. Next? – Wall Street Journal