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Rising interest rates are putting the United States on a collision course with its swelling debt burden, according to Goldman Sachs. The warning is blunt: elevated borrowing costs could force Washington to confront deficit reduction sooner than expected.

Goldman Sachs strategist Pierfrancesco Mei outlined the danger in a note released Tuesday. “Persistently higher rates would boost interest expense as a share of GDP — a key gauge of the cash outflows needed to service the debt — and push the debt-to-GDP ratio up to 132% by 2035, 10 percentage points above our baseline, raising the odds that deficit reduction becomes necessary sooner to stabilize the debt,” Mei wrote.

US Treasury yields have climbed aggressively this year, raising the federal government’s debt servicing costs. The benchmark 10 year Treasury yield has surged more than 115 basis points, rising from around 4.10% late last year to a 24 year high of roughly 5.28%.

A sustained sell off across the bond market has accompanied inflation linked to the US war on Iran. Those inflation pressures prompted the Federal Reserve to raise interest rates last month, while the economy’s resilience amid pricing pressures has also contributed to the bond market decline.

The timing presents an especially difficult problem for those watching the federal debt. Higher yields make it more expensive for the government to service what it already owes, intensifying pressure on federal revenue.

Annual US interest expense has climbed to a record 18.5% of federal government revenue, according to new analysis from bond investment firm DoubleLine. That figure exceeds the previous record of 18.4%, which was set in 1991.

The share has more than quadrupled over the past four years. Annual interest expense now stands at a record $1.25 trillion, more than four times the level recorded in 1991.

That increase represents a fundamental threat to long term fiscal stability. Nearly $1 out of every $5 collected by the federal government now goes toward servicing existing national debt rather than other federal priorities.

Those dollars could otherwise support productive investments such as national defense and infrastructure, as well as social safety net programs including Social Security. As debt servicing costs overtake major federal programs, mandatory spending risks squeezing discretionary spending.

That pressure can create a negative feedback loop. The government may need to issue additional debt simply to cover the interest costs generated by its existing obligations.

The growing structural burden also limits the government’s flexibility to deploy fiscal stimulus during future recessions. A larger portion of revenue committed to interest leaves less room for officials to respond when economic conditions deteriorate.

Billionaire Carlyle Group cofounder David Rubenstein said the country has already crossed a troubling threshold. He addressed the issue during a new episode of the Power Players with Brian Sozzi podcast.

“We have, as everybody now knows, $40 trillion of debt. Now, historically, if you go back over the last, let's say, 300 or 400 years, whenever a country paid more interest on its debt than it did for its national security, that's a sign of weakness in the country. Right now, we've crossed that threshold,” Rubenstein said.

Goldman Sachs projects that persistently higher rates could drive the debt ratio to 132% of GDP by 2035, placing it 10 percentage points above the firm’s baseline. Combined with record interest expenses, that path raises the prospect of deficit reduction becoming necessary sooner to stabilize the debt.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.