The 10-year Treasury note closed at 5.26% Tuesday, more than a point above the 4.1% the Congressional Budget Office projected it would average this year, a gap that could raise taxpayers’ borrowing costs as federal debt rolls over.
The government spent $1.05 trillion on net interest in the first 11 months of fiscal 2026, more than it spent on Medicare or the military, according to the Congressional Budget Office’s monthly budget review for August.
Medicare cost $976 billion over the same period and military spending totaled $833 billion. Net interest was up 12% from a year earlier, and with a month left in the fiscal year it had already passed the $1.039 trillion the CBO projected for all of 2026 in its February outlook.
“As the bond market warning lights are blinking red, our leaders in Washington seem to be asleep at the wheel,” Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said in a statement Tuesday. “Washington needs a fiscal intervention.”
The warning follows a Sept. 24 CBO analysis prepared at the request of U.S. Sen. Jeff Merkley, D-Ore., the ranking member of the Senate Budget Committee. CBO found that if the average interest rate on federal debt rose until it was 1 percentage point above the agency’s baseline, total deficits would be about $1.5 trillion larger over the next decade and debt would reach 222% of gross domestic product by 2056, 47 percentage points higher than projected.
CBO’s scenario measures the average interest rate the government pays across all its debt, not the yield on any single security. Because most federal debt is shorter term and rolls over gradually, a 10-year note above 5% does not mean the government’s overall borrowing cost is already a point above projection. CBO assumes the average rate on federal debt stays below the 10-year yield until 2047.
The government’s average interest rate is still below the 4% average rate CBO uses in its long-term baseline. The average interest rate on all interest-bearing federal debt was 3.49% in August, according to Treasury data, up from 3.33% in March.
Demand at last week’s Treasury sales showed strain. The $70 billion five-year note auctioned Sept. 23 drew bids worth 2.21 times the amount offered, the weakest of any five-year sale in the past year, according to Treasury results.
Primary dealers, the banks obligated to absorb what other bidders leave behind, took 15.8% of accepted competitive bids, up from an average of 11.9% over the prior 12 auctions. Indirect bidders, a category that includes foreign buyers, took 54.3%, down from 63.5%.
Treasury has held five-year auctions at $70 billion and seven-year auctions at $44 billion every month since May, so the weaker bidding came against steady supply rather than a larger offering.
In its Aug. 5 quarterly refunding statement, Treasury said current auction sizes leave it “well positioned to address potential changes to the fiscal outlook” and that it expected to maintain them “for at least the next several quarters.” The next refunding announcement is Nov. 4.
CRFB attributed the recent climb in yields to several forces beyond the debt, including higher oil prices, a strong consumer spending report, competition for borrowing driven by artificial intelligence investment, the Federal Reserve’s decision to raise rates and the weak auction. The group listed the government’s fiscal position as one cause among them.
Treasury issued a readout Tuesday afternoon of a Financial Stability Oversight Council meeting chaired by Secretary Scott Bessent and attended by Federal Reserve Chairman Kevin Warsh. Staff briefed the council on third-quarter developments including trends in debt markets, and the readout said the financial system “remains resilient and poised to support economic growth” and that household financial conditions “remain broadly healthy.” It did not address the rise in Treasury yields.
Treasury did not immediately respond to questions sent Tuesday afternoon about auction sizes and the rise in yields.
Higher Treasury yields can put upward pressure on mortgages, auto loans and other borrowing costs, although the relationship varies by type of loan. The Federal Reserve raised its benchmark rate to a range of 3.75% to 4% on Sept. 16, citing inflation that “remains elevated,” a move President Donald Trump had publicly opposed, writing the next day that rates “should be 1%, or less.” The 10-year yield has risen from 4.96% on Sept. 22 to 5.26% Tuesday.
The seven-year note auctioned Sept. 24 drew bids worth 2.42 times the amount offered, within the range of the past year’s sales. CRFB called that auction “concerning” and the five-year “dismal.”
