Treasury Turns to Short-Term Debt as Interest Costs Near $1 Trillion
Treasury Plans 10-Year Note Buybacks as Federal Interest Costs Surge
WASHINGTON — Total gross federal debt crossed $40 trillion on Aug. 22, 2026, a 7.3 percent increase since the beginning of the calendar year. During the three weeks leading to Aug. 22, total public debt grew by 1 percent, an annualized accumulation rate of nearly 15 percent. Annual net interest payments approached $1 trillion as the U.S. Department of the Treasury moved to restructure its issuance strategy toward shorter-dated debt and lower federal borrowing costs.
The $40 trillion benchmark followed a period of rapid expansion in federal borrowing. Total gross national debt stood at approximately $22 trillion at the start of 2019, growing nearly 50 percent over a seven-year period. U.S. public debt previously crossed $20 trillion in September 2017, $25 trillion in May 2020 following emergency pandemic legislation, $30 trillion in February 2022, and $34 trillion in January 2024.
Figures released in mid-August by the Congressional Budget Office in its Monthly Budget Review tracked federal spending and revenue through July, the first 10 months of fiscal year 2026. The CBO reported that federal debt-servicing outlays totaled $963 billion during that period, up 14 percent from $846 billion during the same period in fiscal year 2025. Net interest was the fastest-growing major spending line in the budget.
During the same 10-month period, the federal budget deficit reached $1.8 trillion, a 10 percent increase compared to the same period a year earlier. Debt servicing is now the second-largest single category in the federal budget, having passed Medicare in total outlays. Social Security spending grew by 5 percent, while spending on Medicare and Medicaid each rose by 8 percent.
Net interest payments equaled 64.9 percent of total Social Security outlays a year earlier and grew to equal 70.1 percent of Social Security spending through July. Under federal budget classifications, interest payments on debt are statutory obligations that must be settled automatically, placing them outside the annual congressional discretionary appropriations process. Mandatory entitlements, including Social Security and Medicare, similarly operate under statutory formulas.
Treasury Secretary Scott Bessent announced a debt-management initiative on Aug. 19 under which the government will buy back substantial volumes of 10-year Treasury notes. The Treasury plans to fund those purchases by issuing new, shorter-term securities carrying lower yield rates.
Approximately 50 percent of U.S. debt held by the public is currently held in Treasury notes with maturities ranging from two to 10 years. Over the past year, yields across these benchmark instruments have increased: the 2-year Treasury yield rose from 3.94 percent to 4.18 percent, a 6 percent increase, while the 10-year Treasury yield rose from 4.37 percent to 4.69 percent, representing a 7.3 percent increase.
The policy maneuver is intended to manage the weighted average interest rate paid across federal obligations by replacing higher-yielding, longer-term paper with shorter-maturity debt. The increase in interest expense also reflects the continued growth of underlying debt and elevated market interest rates.
Those elevated rates reflect adjustments from the Federal Reserve’s monetary policy cycle. Between March 2022 and July 2023, the central bank raised its target federal funds rate from near zero to a range of 5.25 percent to 5.50 percent to counter inflation. As older Treasury securities issued during periods of lower interest rates reach maturity, the Treasury must refinance them by issuing new securities at prevailing market rates, raising the average cost of total debt service.
Treasury buyback programs and issuance adjustments are coordinated through the Treasury’s Office of Financial Markets and executed with primary dealers—the major financial institutions authorized to trade directly with the Federal Reserve Bank of New York. The Treasury regularly alters auction schedules across short-term Treasury bills, medium-term notes, and long-term bonds to adjust debt maturity profiles and maintain market liquidity.
