US debt interest payments surge past $1 trillion yearly pace, worsening concerns about massive borrowing

• US annualized debt interest payments crossed $1 trillion in October, according to a Bloomberg analysis.
• The cost of debt has doubled in the past 19 months as federal deficits balloon.

The estimated annualized interest payments on the US government debt pile topped $1 trillion at the end of October, according to data analyzed by Bloomberg Intelligence.

Calculated using US Treasury data, which discloses monthly outstanding debt balances and the average interest costs, last month's annualized cost of debt marked a doubling over the past 19 months and was equivalent to 15.9% of the entire federal budget for fiscal year 2022.

"This high proportion of interest payments as a share of federal spending has precedent, as the portion before 2000 was over 14% in most years," Bloomberg Intelligence analysts wrote in a note issued Tuesday. "The challenge for the government is tempering mandatory spending and trying to reduce the need to issue more debt. That's the reason we see interest payments climbing even though we forecast lower Treasury yields."

October's pace of payments suggests debt-service costs are rapidly accelerating amid ballooning federal deficits.

The federal government closed out its 2023 fiscal year in September having spent $659 billion on interest payments, up from $476 billion in fiscal 2022 and $352 billion in fiscal 2021.

The Federal Reserve's aggressive rate-hiking campaign has jacked up the cost of credit for borrowers across the economy, and the US government is no exception. Higher borrowing costs mean the government pays more interest on its debt.

And rising US debt interest payments create a vicious feedback loop: to attract new borrowers, yields on Treasurys have to rise to sweeten the deal, and higher yields aggravate already-high borrowing costs on total debt that now exceeds $33 trillion.

That's bad news for Treasurys, which have suffered a historic collapse over the past few years.

According to market experts like Ed Yardeni, that steep sell-off in bonds was in part spurred by growing concerns over piling US debt, as "bond vigilantes" staged a comeback. And it didn't help when the Fitch credit rating agency downgraded the US government's credit rating this summer.

"Ever since the government debt was downgraded on August 1, people have been focusing on the deficit issue," Yardeni said in an interview with CNBC in September. "If inflation kind of stays sticky here, I think we're going to have a real problem, and my friends, the bond vigilantes, may need to come into force to convince politicians we've got to do something more fundamental about reducing the long-term outlook for the deficit."

If US debt is not brought under control over the next few decades, a default of some form may be unavoidable, according to a Penn Wharton Budget Model.