In recent weeks, investors have once again been confronted with a familiar pattern: yields on long-term U.S. government bonds are rising, while equity markets are becoming increasingly sensitive to every move in rates.
The conventional explanation is straightforward: when interest rates rise, discount rates rise with them, putting downward pressure on equity valuations. Mathematically, that is correct, but it tells only part of the story. The underlying relationship is simpler: money has a price, and when that price changes, the entire capital market has to adjust.
U.S. federal debt has recently surpassed the $40 trillion mark. It is a staggering figure, one that naturally generates headlines and raises concerns. But the absolute size of the debt is not necessarily what investors should fear most.
In fact, focusing solely on the headline number can be misleading. Not because the debt is not real, but because there is no plausible scenario in which the U.S. government would be required to repay $40 trillion all at once. Sovereign governments do not manage their debt the way a household pays down a mortgage. They continuously refinance it.
When a $1 billion U.S. Treasury bond matures, the Treasury typically issues new debt and uses the proceeds to repay the maturing obligation. The more important question, therefore, is not simply how much the U.S. owes, but how much it costs to service that debt.
Consider a simple example. Suppose $1 billion of debt carrying a 2% interest rate matures and is refinanced at 5%. The principal has not changed, but the annual interest expense rises from $20 million to $50 million. Now apply that dynamic across trillions of dollars of debt being refinanced year after year.
And refinancing is only part of the equation.
The U.S. is not merely rolling over existing debt; it is also issuing new debt to finance persistent fiscal deficits. In fiscal year 2025, the federal government collected approximately $5.2 trillion in revenue and spent roughly $7 trillion. The gap - close to $1.8 trillion - had to be financed through additional borrowing.
This brings us to the figure that matters most: interest payments as a share of government revenues.
Net interest payments by the U.S. government are already approaching $1 trillion a year. Against revenues of just over $5 trillion, nearly one dollar out of every five collected by the federal government is now being directed toward interest payments.
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As long as the economy and government revenues grow at a pace that allows the debt burden to be serviced comfortably, even a very large debt load can remain sustainable. The problem begins when the cost of servicing that debt rises faster than government revenues.
At that point, an increasing share of government income is consumed by interest payments on past borrowing. The fiscal deficit widens, more debt must be issued to finance it, and the government becomes increasingly sensitive to the level of interest rates.
This is the cycle that is beginning to concern the bond market.
Still, it is important to keep these concerns in perspective.
The United States remains the world’s largest and most powerful economy. It is home to many of the world’s largest and most innovative companies and remains a global leader in technology, artificial intelligence, semiconductors and biotechnology. The U.S. dollar is the world’s primary reserve currency, while the Treasury market remains the deepest and most liquid government bond market in the world.
So the real issue is not whether the United States can meet its debt obligations. It is whether the cost of doing so will continue to rise - and what that higher cost will mean for the broader economy and financial markets.
As investors demand higher yields, the cost of financing the U.S. government rises - both on newly issued debt and on existing debt that needs to be refinanced. But the consequences extend far beyond the Treasury market. Corporate financing becomes more expensive, the relative attractiveness of different asset classes changes, discount rates rise, and equity valuations have to adjust to the new environment.
At the same time, not every rise in yields should necessarily be viewed as negative.
If yields rise because the economy is stronger, growth is accelerating and corporate earnings are expanding, equity markets can absorb higher interest rates. The concern becomes more significant when yields rise because of persistent inflation, widening fiscal deficits or a growing supply of government debt - without a corresponding improvement in economic growth.
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And this is precisely where there is also reason for optimism.
The solution to America’s growing debt burden does not necessarily have to come solely from spending cuts or higher taxes. It can also come from the other side of the equation: stronger economic growth and higher productivity.
Hundreds of billions of dollars are currently being invested in semiconductors, data centers, software and artificial intelligence infrastructure. If these investments translate into genuine productivity gains - allowing workers to produce more, companies to generate greater output from the same resources, and the economy to grow faster - the impact could extend far beyond the profits of technology companies.
Higher productivity can lift GDP, wages and corporate profits. It can broaden the tax base and increase government revenues. And the United States has an extraordinary advantage in this respect: many of the companies leading the AI revolution are American, as is a significant share of the capital, research and innovation driving it.
There is an interesting irony here.
At the very moment markets are becoming increasingly concerned about the rising cost of U.S. debt, a technological revolution is taking place that could significantly increase the economy’s capacity to carry that debt.
The key question, therefore, is not whether the United States will one day repay $40 trillion.
The real question is what happens to the relationship between the cost of that debt and the economy’s ability to support it.
And if the AI revolution delivers the productivity leap many expect, the answer could ultimately prove considerably more optimistic than today’s bond-market fears suggest.
- The above reflects the personal opinion of the author only, is provided for general informational purposes, and does not constitute investment advice, investment marketing or a recommendation to take any action with respect to securities or financial assets.
- The writer is the CEO of Tamir Fishman Mutual Funds