Higher interest rates increase federal borrowing costs, but the full effect arrives gradually. Treasury generally pays fixed rates on securities already outstanding. As those securities mature, the government refinances them at then-current rates. If interest costs rise, the deficit widens; financing that larger deficit requires more borrowing, which increases debt held by the public and can produce still higher interest costs later.
The size of the effect depends on two variables: the amount of debt held by the public and the average interest rate paid on it. Congressional Budget Office (CBO) projections illustrate both the near-term budget pressure and the much larger long-term debt consequences under sustained higher-rate assumptions.
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What “higher interest rates” change in the federal budget
The federal budget records net interest outlays: interest paid on debt held by the public minus interest income the government receives. This is narrower than every interest payment made by the Treasury. Interest credited between federal accounts, such as payments to government trust funds, is an intragovernmental transaction and does not increase the budget deficit.
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The relevant debt measure in the CBO projections discussed here is debt held by the public. It represents federal debt owned outside the federal government, including by investors and institutions. When this debt is larger, a given increase in the average rate produces a larger dollar increase in interest costs.
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It is also important to separate the primary deficit from the total deficit. The primary deficit excludes net interest outlays. The total deficit combines the primary deficit and net interest. A rise in rates can therefore increase the total deficit even if tax collections and noninterest spending are unchanged.
A simplified way to think about the relationship is:
Net interest cost ≈ debt held by the public × average interest rate paid on that debt, adjusted for interest income.
This is an explanatory relationship, not a forecasting formula. The actual budget result also reflects the maturity schedule of Treasury securities, the mix of bills and longer-term bonds, inflation-linked payments, and changes in interest income.
Why the effect is gradual rather than immediate
A change in market rates does not instantly reprice every Treasury security. Most outstanding securities carry a fixed coupon until maturity. Treasury feels higher rates when it issues new debt and when it replaces maturing securities. Because maturities are spread over time, the average rate on the entire debt stock adjusts gradually.
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Refinancing maturing securities
Suppose a Treasury security issued years ago carries a comparatively low fixed rate. If it matures while market yields are higher, Treasury must replace it with a new security priced at the higher yield. The new rate applies to that refinancing, while the old rate no longer applies to the retired security. Repeated across the maturity schedule, this process raises the average rate paid on debt held by the public.
New borrowing adds another exposure
Higher rates also apply to debt issued to finance current deficits. If the government borrows more this year, the new securities add to the amount on which future interest is calculated. The budget therefore experiences two related effects: refinancing existing debt at higher rates and issuing additional debt because the deficit itself is larger.
“In these scenarios, higher interest rates increase net interest costs and federal budget deficits in two key ways.”
— Congressional Budget Office, Projections of Deficits and Debt Under Two Scenarios With Higher Interest Rates (October 2026)
How interest costs can create a deficit-and-debt feedback loop
- Market rates rise. New Treasury securities and refinanced securities carry higher rates.
- Net interest outlays increase. The higher average rate reaches more of the debt stock as securities mature.
- The total deficit widens. Unless policymakers offset the additional interest spending with higher revenues or lower primary spending, the government needs more financing.
- Debt held by the public grows. The additional borrowing increases the principal on which future interest is charged.
- Future interest costs can rise further. The larger debt stock magnifies the effect of subsequent rates.
This loop does not mean every rate increase produces an immediate debt crisis. The timing and size depend on how much debt matures, how long the higher rates persist, economic growth, primary deficits, and the government’s interest income. It does mean that sustained higher rates have effects that compound over the budget horizon.
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CBO’s February 2026 baseline: interest spending already rises
CBO’s The Budget and Economic Outlook: 2026 to 2036 projects net interest outlays of $1.0 trillion in 2026, increasing to $2.1 trillion in 2036. As a share of the economy, net interest rises from 3.3 percent of GDP in 2026 to 4.6 percent in 2036.
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| Year | Projected net interest outlays | Share of GDP |
|---|---|---|
| 2026 | $1.0 trillion | 3.3% |
| 2036 | $2.1 trillion | 4.6% |
The dollar increase and the GDP-share increase convey different information. Dollars show the budget resources devoted to interest. The GDP share compares those costs with the size of the economy, which helps indicate how large the burden is relative to national income.
What CBO’s higher-rate scenarios show about long-term debt
A scenario is a conditional calculation, not the baseline forecast. CBO’s September 24, 2026 report, Projections of Deficits and Debt Under Alternative Scenarios for Interest Rates and the Budget, models a case in which interest rates are 1 percentage point above the extended baseline. Under that scenario, debt held by the public reaches 222 percent of GDP in 2056, compared with 175 percent of GDP in the extended baseline.
The comparison is meaningful only when the horizon, debt measure, and assumptions are kept consistent. Both figures are debt held by the public in 2056; the difference comes from the higher-rate assumption and its effects on interest costs, deficits, and additional borrowing.
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| CBO September 2026 projection | Interest-rate assumption | Debt held by the public in 2056 |
|---|---|---|
| Extended baseline | Extended-baseline rates | 175% of GDP |
| Higher-rate scenario | Rates 1 percentage point above the extended baseline | 222% of GDP |
The 47-percentage-point difference is not a prediction that rates will be exactly 1 percentage point higher. It shows the sensitivity of a long-term debt path to a sustained rate change under the report’s other assumptions.
A separate near-term CBO scenario: 4.3% versus 4.8%
CBO’s October 2026 analysis uses a different horizon and a different rate experiment. In the forecast underlying that report, the 10-year Treasury rate averages 4.3 percent over 2026–2036. In a separate scenario, the average is 4.8 percent, or 50 basis points higher.
Do not combine these numbers with the September long-term comparison. The 4.3-versus-4.8 percent result is a 2026–2036 10-year-rate scenario, while the 175-versus-222 percent figures are a 2056 debt-to-GDP comparison using rates 1 percentage point above an extended baseline.
| October 2026 analysis | Average 10-year Treasury rate, 2026–2036 | What it represents |
|---|---|---|
| Forecast underlying the analysis | 4.3% | CBO forecast rate |
| Higher-rate scenario | 4.8% | 50 basis points above that forecast |
Both analyses are model-based estimates. They are useful for understanding direction and sensitivity, but neither should be read as a guaranteed path for interest rates, deficits, or debt.
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Two governments with the same average interest rate can have very different interest bills if their debt stocks differ. As debt held by the public grows, even a modest change in the average rate applies to a larger principal. Conversely, a high market rate may take years to pass through to the average rate if much of the existing debt is locked in at older, lower coupons.
This is why a single current Treasury yield does not tell you the government’s current interest bill. The budget measure reflects the average cost of the entire publicly held debt portfolio, the timing of maturities, and interest income. It also explains why the effect of a rate shock can continue after market rates stop rising: securities maturing later are still refinanced at the newer rate.
What higher net interest means for other budget choices
Net interest is generally treated as an obligation that must be paid to holders of Treasury securities. When it takes a larger share of federal spending or GDP, fewer budget resources remain available for primary spending unless revenues increase or other outlays decrease. The rate channel therefore affects debates over taxes, benefit programs, defense, infrastructure, and other policies indirectly through the deficit arithmetic.
The distinction between primary and total deficits helps identify the source of a change. A policy can leave the primary deficit unchanged while higher rates make the total deficit larger. Alternatively, a policy that reduces the primary deficit can offset some or all of the additional interest cost. CBO’s projections do not imply that one particular policy response will occur; they show what follows under specified assumptions.
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How to use CBO’s debt-service tool
CBO provides a public 2026–2036 debt-service tool that lets readers explore approximate effects of changes in federal revenues or outlays on net interest costs, deficits, and debt relative to the February 2026 baseline.
- Open the tool and select a change in revenues or outlays.
- Review the displayed effect on net interest costs over 2026–2036.
- Check the resulting change in deficits and debt, rather than looking only at the first-year effect.
- Compare scenarios using the same baseline and time horizon.
The tool’s results are approximate. They do not constitute an official CBO estimate for a particular policy proposal, and they should not be presented as a forecast of legislation that has not been analyzed by CBO.
How to interpret claims about “the national debt”
News coverage often uses “national debt” as a broad label, but the rate analysis here uses debt held by the public. Ask three questions when reading a claim:
- Which debt measure? Debt held by the public is different from gross federal debt, which also includes intragovernmental holdings.
- Which interest measure? Net interest outlays subtract interest income and exclude intragovernmental interest transactions from the deficit.
- Which projection? A baseline follows CBO’s stated assumptions; a scenario changes one or more assumptions and is conditional on that change.
Keeping those definitions straight prevents a common error: treating every Treasury interest payment as a direct addition to the deficit or treating a scenario result as CBO’s central forecast.
The practical bottom line
Higher rates affect the federal budget through a slow-moving refinancing process and a faster borrowing-cost effect on new debt. The first step is higher net interest outlays; the second is a larger deficit if no offsetting action is taken; the third is additional debt held by the public; and the fourth can be still higher interest costs on that larger debt. CBO’s 2026 baseline already projects net interest rising from $1.0 trillion to $2.1 trillion between 2026 and 2036, while its conditional scenarios show how sustained rates above baseline can push long-term debt substantially higher.
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