Interest Rates Rising Above CBO Projections

Interest rates are running above the Congressional Budget Office’s (CBO) projections from the most recent baseline. These higher interest rates could have significant effects on the budget.

Actual Interest Rates vs. CBO’s Projections

In its February 2026 baseline, the CBO projected that the interest rate on 10-year Treasury notes would average 4.06 percent in the first quarter of 2026 and 4.09 percent in the second quarter.¹

The actual interest rate was 4.20 percent in the first quarter (14 basis points higher than the CBO’s baseline) and 4.42 percent in the second quarter (33 basis points higher than the baseline).²

Actual interest rates were similarly higher than projected for three-month Treasury bills. The CBO projected the interest rate would be 3.47 percent in the first quarter and 3.28 percent in the second quarter. Instead, they were 12 basis points higher in the first quarter at 3.59 percent and 34 basis points higher in the second quarter at 3.62 percent.³

Fiscal Effects of Higher Interest Rates

Interest rates have significant impacts on the federal budget. Using CBO’s economic rule of thumb workbook, we can estimate the costs of changes in interest rates relative to the baseline.⁴

Based on the higher interest rates that have been observed this year, federal outlays would increase by an estimated $101.4 billion over the FY 2026–2036 budget window relative to the CBO’s February 2026 baseline.

If interest rates remain elevated above the CBO’s baseline forecast throughout the rest of the 10-year budget window, outlays would increase by nearly $1.3 trillion over the FY 2026–2036 budget window.

In this scenario, the net interest costs in FY 2036 would be about $2.4 trillion, 9.6 percent ($206 billion) higher than the CBO’s baseline projection. Interest spending would be projected to grow from 3.2 percent of GDP in FY 2025 to 5 percent of GDP in FY 2036.

Rising Interest Costs

Treasury interest rates reflect the supply and demand for federal debt as well as factors including monetary policy, inflation, and economic growth expectations.

Since World War II, debt issued by the US Treasury has been considered the worldwide safe asset. Investors want to hold US government debt because it is expected to be repaid in full, highly liquid, and denominated in dollars, reflecting its status as the reserve currency. Investors around the world pay for this perceived safety by accepting a lower interest rate on US Treasury debt, known as a convenience yield.

However, there is evidence that the convenience yield is diminishing, as government spending grows faster than economic growth and excessive supply of debt outpaces demand. A falling convenience yield translates to higher interest rates and costs borne by American taxpayers.⁵

The national debt now exceeds the size of the US economy. The debt held by the public has grown to more than $31.6 trillion, eclipsing the gross domestic product (GDP) over the last year.⁶ The CBO projects the debt held by the public as a percentage of GDP to surpass the post-World War II high of 106.1 percent by FY 2030. Under the current fiscal trajectory, the debt is projected to continue growing to 175 percent of GDP over the next 30 years.⁷

A larger stock of debt and higher interest rates lead to higher net interest spending. The interest costs of financing the national debt have surpassed national defense and Medicare and are now the second-largest category of spending in the federal budget, trailing only Social Security. Interest spending has grown to more than 2.5 times the pre-pandemic level, from $375 billion in FY 2019 to $971 billion in FY 2025. Interest costs already consume more than one-third of income taxes, and the CBO projects that interest outlays will be equivalent to more than 50 percent of income taxes by FY 2036.

When the level of debt is high and interest rates are high, the federal government ends up absorbing a large portion of capital available for investment from the rest of the economy. This has the effect of crowding out other investments, thereby making it more difficult for the private sector to access capital needed for economic growth. Instead of financing new innovations and increasing productivity, capital is allocated toward paying for past government spending.

Policymakers should treat higher interest rates as a warning sign. Congress should confront rising interest costs by reducing persistent deficits before debt service crowds out national priorities and imposes even larger burdens on taxpayers.

Matthew Dickerson

Senior Fellow in Budgetary Analysis

Matthew Dickerson is recognized as a leading expert on fiscal policy issues, including the budget, appropriations, and economic opportunity. He brings more than a dozen years of Capitol Hill experience as well as management roles at leading policy institutions.

Dickerson was previously the Director of Budget Policy at the Economic Policy Innovation Center (EPIC).

In other previous roles, he served as Senior Policy Advisor on the House Budget Committee, where he helped lead development of the fiscal year 2024 Reverse the Curse budget resolution. He was Director of The Heritage Foundation’s Grover M. Hermann Center for the Federal Budget. Dickerson was Policy Director of the Republican Study Committee and served as Legislative Director for the late Congressman C.W. Bill Young, former Chairman of the House Appropriations Committee.

Dickerson has written hundreds of publications, testified before Congress, and advised lawmakers and stakeholders on the federal budget process.

Dickerson is also founder and President of Baseline Policy, where he provides federal fiscal policy research and analysis.

Dickerson is a graduate of the College of William and Mary in Virginia and holds a Bachelor of Arts in Government and History.