With the passage of Donald Trump’s “One Big Beautiful Bill Act” (OBBBA), the US has chosen to pile more debt onto an already overloaded balance sheet.
The federal debt now stands at $37 trillion. Interest payments will soon exceed $1 trillion per year. That’s more than the entire US defense budget.
Yet bond markets remain strangely calm. Yields are rising, but not panicking. Perhaps investors haven’t fully grasped what’s coming.
This is no longer about theoretical debt ceilings or abstract fiscal debates. The numbers are visible, the risks are multiplying, and the market reaction is lagging behind reality.
How big is the damage?
According to the Congressional Budget Office, the new bill will add at least $3.4 trillion to the deficit over the next decade. Other estimates go further.
The Committee for a Responsible Federal Budget (CRFB) puts the number closer to $4 trillion, with a longer-term range of $15 to $31 trillion if the tax cuts in the bill are made permanent.
This comes on top of an existing debt load that already equals 124% of GDP, up from 104% in 2017.
The US hasn’t seen debt levels like this since World War II. But back then, the country had high post-war growth, a rising labor force, and fewer structural liabilities.
Today, the picture is different. The US population is aging. Entitlement spending is rising. The cost of servicing debt is getting more expensive, not less.
Why aren’t bond markets screaming?
Investors are beginning to respond, but only slowly. In the second quarter of 2025, long-term bond funds saw $11 billion in outflows, the fastest pace since the COVID shock in 2020.
Meanwhile, $39 billion flowed into short-duration bonds, a clear shift toward safety.
But the broader bond market hasn’t fully priced in the risks. The 10-year Treasury yield has risen, but only moderately.
The assumption is that the Fed will intervene if things get worse. But that assumption is now questionable.
Unlike in the past, the Fed no longer has the same room to maneuver. In the 2008 financial crisis, quantitative easing suppressed yields.
During World War II, yield curve control helped finance spending without sparking inflation. Neither strategy is easy to repeat today.
Inflation is still above target. Interest rates are already at 4% to 5%. Reintroducing yield suppression now could trigger another inflation cycle. The Fed is caught between rising debt costs and the need to maintain price stability.
The risk is no longer just fiscal. It’s political
What makes this moment different is the lack of political willingness to reverse course. In theory, fiscal consolidation is possible. In practice, there is no appetite for it.
The OBBBA’s central feature is a sweeping tax cut. Most of the benefits go to the wealthiest Americans.
Even with cuts to Medicaid, energy programs, and food assistance, the revenue loss is not offset. The bill assumes future spending cuts will kick in, but history suggests otherwise. Temporary tax cuts often become permanent. Future austerity is always pushed off.
The administration defends the bill by arguing it will spur growth and reduce deficits. But the evidence is weak.
Trump’s 2017 tax cuts slightly boosted investment, but only offset about 2% of the revenue loss, according to research by Chodorow-Reich and Zidar (2024). There is no reason to expect better results this time.
Behind the scenes, some economists suspect the bill’s true goal is political: to deliver short-term gains before the 2026 midterms, win back high-income donors, and distract voters with culture war messaging.
Long-term solvency is not part of the strategy.
What does this mean for investors?
The US has entered a structural debt phase. That means borrowing is no longer tied to one-off events like wars or recessions. It’s embedded in the system.
If interest costs continue to rise and GDP growth slows, the government will need to borrow just to pay interest.
This is the beginning of a debt spiral. And it matters for everyone holding US assets. Not just bonds, but stocks and US dollars too.
Foreign demand for Treasuries is softening. The Fed is slowing its balance sheet runoff, but it remains hesitant to re-expand.
If market confidence in the US fiscal position slips, whether due to inflation expectations, default risk, or sheer exhaustion, bond yields could spike rapidly.
Higher yields mean lower stock valuations, tighter lending, and falling investment. The scenario resembles the early 1980s but without Paul Volcker’s credibility or the same margin for error.
And right now, the market heavily hinges on the idea that interest rates are about to come down soon. That’s far from guaranteed.
No one knows when the tipping point comes. But the logic is clear. If debt grows faster than GDP, and interest costs grow faster than revenues, markets will eventually respond.
Markets are still calm. But history shows that confidence unravels slowly, then suddenly. For now, the world is still buying Treasuries.
But eventually, someone asks whether the US can pay the bill. When that question gets asked loudly enough, the answer won’t come from press briefings. It will come from yields.
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