US debt interest rates rise in the face of uncertainty generated by Trump

WashingtonThe interest rates on ten-year US Treasury bonds soared this Wednesday above 5.3%, thereby surpassing the peak reached in 2007 – the year before the bursting of the real estate bubble – and reaching their highest level since 2002. The figure is an indicator of how the perception of risk associated with the US economy under the administration of President Donald Trump is changing among investors.

The too big to fail factor of the United States as the world's leading economic power had always meant that bonds were treated as a safe-haven asset. But now the trade war and the war in Iran are partially cracking that image. This element is one of those that explain why, since Trump's return to the White House, interest rates on US debt have risen intensely.

The increase in Treasury bond interest rates is also explained, in part, by the rapid growth of the country's debt, which this August already stood above 40 trillion dollars. In 2024, just before Trump was inaugurated as president, the country's debt was around 35 trillion dollars. The more indebted a country is, the higher the interest rates that companies and private individuals demand to buy its debt, as the risk of a hypothetical default increases the more money a government owes.

In this sense, the war in Iran has become an accelerator of the country's indebtedness. Beyond the inflationary effect it has caused – due to the rising cost of oil and natural gas – the deployment of troops in the region and the continuous use of weaponry have sent US administration spending soaring.

This is in addition to other decisions and announcements by the US president that have put investors on alert. For example, the promise he made to voters to give 5,000 dollars to every adult citizen of the country if the Republicans win the mid-termelections would be a hard blow to the public coffers. In total, doing so would cost more than a trillion dollars, a fact that would also have a strong impact on the country's public debt.

The erratic trade policies of the White House, with an open tariff war with direct rivals like China but also with old partners and neighbors –especially Canada, Mexico, and the European Union–, have favored the increase in the cost of living for Americans. Food and gasoline are not the only things rising; mortgage rates keep increasing amidst a rampant housing crisis in the country. 30-year mortgage interest rates have gone from 7.03% to 7.28%, the biggest jump since October 2022, according to Freddie Mac, a company dedicated to buying mortgages from lenders.

Debt follows the Fed's policy

This increase in credit interest rates originates from the policy of the Federal Reserve (the Fed, the country's central bank). The inflationary effect of the war forced this body to raise interest rates for the first time since 2023 – specifically a quarter of a point, between 3.75% and 4%– because inflation is already bordering on 3.4%. The central bank's decision to raise rates is also one of the other factors that have encouraged lenders to demand that the US government pay higher interest when selling its debt.

The US economy is in a complicated moment: inflation remains far from the targets set by the central bank (2% in the medium term), while the economy is growing despite the labor market not reflecting this wealth creation, partly because almost all growth is the result of the artificial intelligence (AI) industry, a sector that raises doubts among economists due to the possibility that it could end up becoming a bubble. In fact, before leaving the presidency of the Fed, Jerome Powell had already acknowledged that part of these good macroeconomic data were linked to the AI boom in the stock markets and that its evolution needed to be monitored.