WASHINGTON — Financial markets are displaying increasing reluctance to lend money to President Donald Trump’s administration, pushing interest rates higher in ways that are intensifying affordability challenges, slowing economic expansion and presenting fresh political risks for Republicans ahead of November’s midterm contests.
The surge in energy costs sparked by the Iran war has affected bond pricing for U.S. government financing. Rates on 10-year Treasury notes have risen above 4.44%, climbing from 3.95% prior to the conflict’s start in late February. Home loan rates have reached nine-month highs, while vehicle purchases are declining.
This issue spans the globe, with borrowing costs increasing across multiple nations as markets adapt to expectations of elevated inflation, growing concerns over government debt sustainability, and a significant increase in artificial intelligence investments.
Trump has attempted to reassure the public that he possesses a strategy to reduce the approximately $1.8 trillion yearly budget shortfall. Previously, he has highlighted income from tariffs, payments from international visitors for his “Gold Card” visa program, reductions implemented by the Department of Government Efficiency, and accelerated economic expansion. Recently, he indicated the fraud task force headed by Vice President JD Vance would be crucial for achieving substantial savings.
“If he does really great, we’ll have a balanced budget without having to do anything,” Trump said.
Economic experts believe Trump’s approaches to significantly reduce the deficit are unlikely to achieve the promised outcomes.
The expense of managing the national debt has increased threefold since 2021 to exceed $1 trillion yearly, according to Jessica Riedl, a budget and tax fellow at the Brookings Institution.
“President Trump signed a tax cut bill that will likely add $5 trillion to 10-year deficits — and tariffs are offsetting only a small fraction of those costs,” she said. “Budget deficits are still projected to soar past $4 trillion annually within a decade under current policies.”
Budget shortfalls are anticipated to expand over the coming decade as Social Security and Medicare expenses exceed tax collections.
The 10-year Treasury rate reached 4.67% in mid-May before moderating as Iran ceasefire discussions progressed — similar to how rates initially rose in 2025 due to Trump’s “Liberation Day” tariffs before declining when Trump reduced the most severe increases.
When Kent Smetters, faculty director of the Penn Wharton Budget Model, analyzed the mathematics behind rising 30-year Treasury yields, he determined that 60% of the increase stemmed from expectations that America will maintain its excessive borrowing, while the remaining 40% related to inflation caused by the Iran war and Trump’s tariffs.
Glenn Hubbard, a former chairman of the White House Council of Economic Advisers during the George W. Bush administration, expresses concern that the U.S. may no longer possess the same borrowing flexibility as previously to effectively address an economic crisis, such as the 2008 crash or the coronavirus pandemic.
“I don’t think we have the space that we had in 2008 or 2020 to deal with it,” said Hubbard, now a professor at Columbia University’s Business School. “Washington doesn’t seem to be full of ideas — good or bad — to solve it.”
Elevated borrowing costs are providing Democratic candidates in congressional races another attack strategy during a period when voters worry about expensive food and gasoline.
In Colorado’s fifth congressional district, Democrat Jessica Killin is emphasizing the message that ongoing deficits and increased interest rates complicate home purchases or renovations, new vehicle purchases, and credit card debt management.
“Things are already expensive,” said Killin, an Army veteran who was a top aide to Doug Emhoff, the former second gentleman. “We can already talk about gas, but the cost of borrowing only makes that worse.”
Joe Reagan, an Army veteran also pursuing the Democratic nomination, stated in an email that he discusses “a lot about fiscal stewardship” during his campaign. “Every dollar spent paying interest is a dollar that isn’t being invested in infrastructure, education, veterans’ services, or economic growth,” he said.
They are competing against Republican Rep. Jeff Crank in a district their party considers a potential gain. Killin described the deficit as demonstrating how “Trump says one thing and does the opposite.”
In his March 2025 congressional address, Trump announced that “in the near future, I want to do what has not been done in 24 years: balance the federal budget. We’re going to balance it.”
Crank, the Republican incumbent, did not respond to comment requests.
The administration insists it will gradually decrease budget deficits. Compared to the total economy, last year’s deficit was smaller than in 2024, though this reduction partially relied on tariff income subject to refunds following the Supreme Court’s ruling declaring them illegal.
Treasury Secretary Scott Bessent recently referenced a report indicating up to $500 billion in annual fraudulent government expenditures that could be eliminated, “so that would reduce the deficit substantially.”
Bessent appeared to base this conclusion on a 2024 Government Accountability Office report estimating between $233 billion to $521 billion yearly in fraudulent spending. However, these figures were partially derived from the pandemic period when the government borrowed extensively to stabilize the economy.
The White House and Treasury did not respond to inquiries regarding Bessent’s claims’ sources.
Regarding deficits, Bessent told White House reporters that the administration essentially inherited poor conditions from former President Joe Biden, a Democrat. “We inherited the worst budget deficit in history — in history — when we were not in a recession or not at war,” Bessent said.
Bessent had previously stated the administration would target reducing the annual deficit to 3% of total U.S. gross domestic product. It currently stands at roughly twice that percentage, and Bessent avoided directly answering questions about the timeline for reaching his goal.
Currently, investors continue purchasing U.S. company shares, driving stock market gains that signal confidence in America’s economic prospects. However, rising interest rates also indicate investors perceive the national debt as a U.S. weakness.
Financial markets might inflict sufficient pressure through higher rates to force political leaders to address systemic imbalances. Several economists predicted markets would compel deficit action before voters would.
Hubbard stressed that the entire bond market system depends on confidence that debt will be repaid. He observed that “credit” derives from a Latin term also rooting the word creed about belief systems.
“That is what debt is about: I believe you will pay me back,” Hubbard said. “That works until it doesn’t.”
