CBO Models $6 Trillion Debt Feedback in Higher-Interest-Rate Scenario
By Asymmetric Analytics
Analysis
The Congressional Budget Office estimates that if all interest rates ran 1.5 percentage points above its baseline from 2026 through 2036, cumulative federal deficits would be $6.0 trillion larger — a scenario, not a forecast, that shows how higher borrowing costs feed on themselves as the Treasury borrows to pay the extra interest.
What CBO found
CBO's October 8 analysis tests two cases in which interest rates are higher than those underlying its February 2026 baseline. In the larger case, all interest rates are 150 basis points higher over 2026–2036, and the 10-year Treasury yield averages 5.8% rather than the baseline's 4.3%. Cumulative deficits are then $6.0 trillion larger: roughly $4.9 trillion from higher interest on baseline borrowing and $1.1 trillion from interest on the additional debt that borrowing creates.
In the smaller case, rates are 50 basis points higher (a 4.8% average 10-year yield) and deficits grow by nearly $2 trillion. CBO holds other economic variables constant, so these are conditional scenarios, not predictions of where yields will trade, and they do not model effects on growth or inflation.
Debt held by the public reaches 133.1% of GDP in 2036 in the 150-basis-point case, against 120.2% in the baseline. For reference, CBO notes the 10-year yield closed at 5.2% on October 1 — a market observation, not its baseline assumption.
Separately, CBO's September monthly budget review estimates the FY2026 deficit at $2.0 trillion, $218 billion more than in FY2025.
Why the debt feedback matters
The Treasury does not refinance its entire debt stock when yields rise. Fixed-rate bonds keep their coupons until maturity, but new borrowing and maturing securities roll over at the higher rates.
Causal chain — as modeled by CBO:
Higher sustained yields → more expensive Treasury refinancing → larger net interest outlays → wider deficits → additional Treasury borrowing → further debt-service costs.
Whether that feedback accelerates depends on why rates rise, the gap between interest rates and nominal growth, fiscal policy, and how investors price inflation and sovereign risk. Rates rising alongside stronger nominal growth are less damaging to debt ratios than rates rising on a higher term premium alone.
What Treasury is doing
In August the Treasury raised the maximum size of its long-end liquidity-support buybacks — in the 10- to 20-year and 20- to 30-year nominal coupon sectors — from $2 billion to at least $4 billion per operation, effective September 9 through the November refunding. Treasury describes these as support for secondary-market liquidity.
Those buybacks are not Federal Reserve quantitative easing and do not reduce the government's underlying liabilities. Buybacks and the mix of short- versus long-term issuance can change financing conditions, but neither resolves persistent primary deficits or investor demand for higher yields.
What AA is watching
Treasury's November 4 quarterly refunding announcement and any change to buyback sizes or the maturity mix of issuance.
Auction demand and long-term term premiums.
Subsequent CBO updates on net interest, the primary deficit and debt held by the public.
Primary sources
Congressional Budget Office — Monthly Budget Review: September 2026 (October 8, 2026)