CBO Says Rates 1.5 Points Higher Would Add $6 Trillion to Deficits by 2036, With the 10-Year Yield Already at 5.2%

The Congressional Budget Office published two higher-interest-rate scenarios on 8 October, and the bond market is already more than halfway to the worse one. CBO’s February baseline assumed the 10-year Treasury yield would average 4.3% from 2026 to 2036. The yield closed at 5.2% on 1 October.

A scenario that looked like a stress test in February now sits close to where the market trades.

We covered the headline numbers when they came out, in our post on interest costs topping defence and Medicare. This post looks at how the scenarios are built, what the market has already priced, and what Treasury’s final numbers for fiscal 2026 add.

Two scenarios, one already overtaken

CBO shifted every interest rate in its model by the same amount for the whole decade and left the rest of its economic forecast alone. In the first scenario rates run 150 basis points above the baseline, so the 10-year averages 5.8%. In the second they run 50 basis points above, an average of 4.8%.

The 5.2% close on 1 October sits between the two. It’s already above the milder scenario’s ten-year average.

Under the 150-point case, deficits over 2026 to 2036 are $6.0 trillion larger than in the baseline. Debt held by the public reaches 133.1% of GDP in 2036, against 120.2% in the baseline. Under the 50-point case, deficits are $1.9 trillion larger and debt reaches 124.4%.

The split inside those totals matters more than the totals. In both scenarios about five-sixths of the extra deficit is higher interest on debt the government would have issued anyway: $4.9 trillion of the $6.0 trillion, and $1.6 trillion of the $1.9 trillion. The rest, $1.1 trillion and $297 billion, is interest on the extra borrowing needed to pay the first part. Most of the damage comes from rolling over debt at new rates.

CBO lists what it left out. The scenarios include no effects on growth, and they don’t say why rates would be higher. If rates rise because of stronger growth, revenue rises too and the picture is less bad. If they rise because investors want more to hold Treasuries, there’s no offset. Fed Governor Christopher Waller said in October that lost safe-haven status may already be adding 50 to 70 basis points to yields.

The 30-year version

A letter CBO Director Phillip Swagel sent on 24 September to Senator Jeff Merkley, the ranking Democrat on the Budget Committee, ran the same question over a longer period. In that scenario rates climb gradually until they’re one percentage point above CBO’s extended baseline. Deficits over 2026 to 2036 grow by about $1.5 trillion, a smaller hit than in the October report because the rise is phased in. By 2056 the difference is large. Debt reaches 222% of GDP, against 175% in the baseline.

The same letter shows the other direction. Holding debt at its 2026 level of 101% of GDP would need primary deficits, the gap before interest, to shrink to an average of 0.2% of GDP over thirty years, from 2.1% in the baseline. Over the first decade that means primary deficits about $7.3 trillion smaller. With the interest saved, total deficits come out about $9.1 trillion smaller.

Put the two side by side. Stabilising the debt takes 74 points of GDP off the 2056 ratio. A one-point rise in rates puts 47 points back on.

Treasury closes the books on fiscal 2026

Treasury’s Monthly Treasury Statement, released on 16 October, confirmed what CBO’s monthly review had estimated on 8 October. The fiscal 2026 deficit was $1.992 trillion, up from $1.775 trillion in fiscal 2025. Receipts were $5.403 trillion and outlays $7.396 trillion. September alone ran a $26.9 billion deficit.

Gross interest on Treasury securities for the year was $1.36 trillion. That’s higher than the $1.143 trillion net interest figure in CBO’s review, mostly because the gross number includes interest the Treasury pays to Social Security and other trust funds, money that stays inside the government.

Customs duties brought in $173.2 billion net of refunds over the year. Refunds of the emergency tariffs the Supreme Court struck down are still flowing: in September they took about three-quarters of gross collections, leaving $5.9 billion, as covered in our post on tariff revenue.

The baseline itself is now eight months old. The longer yields stay near 5%, the less the higher-rate scenarios look like alternatives. The long-term outlook put debt at 175% of GDP by 2056 on the old assumption.

CBO’s next baseline normally comes early in the calendar year. It will start from these rates.