U.S. federal debt stood about $65 billion below $40 trillion at last Friday’s close, placing the Treasury within days of crossing a symbolic threshold that is already shaping views on bonds, the dollar and risk assets. Michael Hartnett, chief investment strategist at Bank of America, wrote in a recent Flow Show note that the total could reach $50 trillion around 2029 if the current pace persists.
The approaching $40 trillion figure arrives as the government’s borrowing costs consume an increasingly large share of federal spending. Hartnett said interest expenses totaled $1.4 trillion over the previous 12 months, approaching the cost of Social Security. He argued that a meaningful reversal in the rise of interest costs would require the five-year Treasury yield to fall below 3.25%, well under recent market levels.
The debt figures place a sharper focus on the tension between Washington’s financing needs and a bond market demanding higher compensation for long-term lending. A 30-year Treasury auction last week cleared at a 5.126% yield, Hartnett noted, the highest yield for that maturity in 25 years. U.S. equities reached a record high on the same day, underscoring how stocks have so far absorbed borrowing-cost pressures that would ordinarily weigh more heavily on valuations.
Interest costs compete with major federal programs
The Congressional Budget Office recorded a federal deficit of nearly $1.8 trillion for the first 10 months of fiscal year 2026, according to the figures cited in the source material. Federal interest payments are expected to move above $1 trillion this year, while debt held by the public reaches 101% of gross domestic product.
Phillip Swagel, director of the Congressional Budget Office, has warned that spending is set to exceed revenue for at least the next decade under current-law projections. Persistent deficits require the Treasury to issue more securities, adding supply to a market already adjusting to reduced central-bank bond buying compared with earlier years.
That supply dynamic does not automatically translate into a financial crisis or a collapse in the dollar’s purchasing power. It does raise the sensitivity of markets to auction demand, inflation data and changes in economic growth. When yields rise, the government must refinance maturing debt at higher rates, which can further increase the interest bill and narrow room for discretionary spending.
Hartnett’s framework, summarized as “ABB, ABD and AI,” reflects that environment: away from bonds, away from the dollar and toward artificial intelligence-related assets. The strategy rests partly on the expectation that policymakers will favor nominal GDP growth — growth including inflation — as a way to improve the debt-to-GDP ratio.
Corporate issuance adds to pressure on long-term yields
Government borrowing is only part of the supply story. Charlie McElligott, a strategist at Nomura, estimated that total corporate bond supply had risen 61% from a year earlier. Financing tied to artificial intelligence, hyperscale computing and data centers has become a major contributor.
Hartnett cited roughly $269 billion in year-to-date investment-grade bond and loan issuance tied to AI and data-center financing. That amount was about 12 times the annual average from 2015 through 2024 and double the full-year total recorded in 2025, according to the note.
The scale of spending reflects the capital intensity of building data centers, acquiring chips and securing power capacity. Companies financing those projects often need to return repeatedly to debt markets, particularly when capital expenditures run ahead of free cash flow. Hartnett identified AI-linked credit as a potential short position on that basis, arguing that further issuance could weigh on bond prices.
The argument carries a broader implication for markets: AI has helped sustain equity enthusiasm, but the infrastructure buildout can also add to the same bond-market supply pressures confronting the Treasury. Higher yields may eventually test the valuations of companies whose expansion plans depend on long-dated financing.
Markets are positioned for changing rate expectations
Despite the rise in long-term yields, several rate-sensitive sectors have outperformed in 2026, Hartnett wrote. The list included real estate investment trusts, biotechnology through the XBI fund, regional banks through KRE and small-cap stocks. Their strength suggests some traders are positioning for yields to be close to a peak rather than entering a sustained new leg higher.
Positioning data referenced by Hartnett showed trend-following commodity trading adviser strategies holding an overall short signal in G10 government bonds. Nominal exposure was at the 12th percentile since 2010, while short-rate positioning stood at the 10th percentile. Such positioning can amplify a bond rally if economic data or central-bank guidance forces traders to cover bearish bets.
Hartnett also pointed to the 10-year Treasury yield near 5% as a level policymakers would prefer not to see decisively breached. A move above that level would lift borrowing costs across mortgages, corporate loans and government financing, potentially slowing demand even if headline economic growth remains firm.
His inflation scenarios put consumer-price inflation in a 2.8% to 3.6% range ahead of the U.S. midterm election season, with core CPI projected between 2.1% and 2.6%. Those ranges would leave the Federal Reserve balancing inflation risks against signs that higher yields are tightening financial conditions without an explicit policy-rate increase.
Debt concerns do not create a mechanical bitcoin trade
The debt narrative has predictably renewed arguments for assets with fixed issuance rules, including Bitcoin. A larger supply of government debt, persistent deficits and concern over future monetary accommodation can strengthen the appeal of scarce assets for some traders seeking alternatives to long-duration bonds or dollar-linked holdings.
Claims that money-supply growth mechanically produces a specific percentage gain in capped digital assets should be treated cautiously. Cryptocurrency prices respond to liquidity, risk appetite, leverage, institutional flows, regulation and network-specific developments, often in conflicting directions. A fiscal deterioration can coincide with a crypto rally, a sell-off, or both at different stages of a broader market move.
The more immediate transmission channel for crypto markets may be Treasury yields and the dollar. Rising real yields can make non-yielding assets less attractive and can pressure highly valued technology shares, which have frequently traded alongside major cryptocurrencies. Conversely, falling yields and a softer dollar can improve liquidity conditions, though neither outcome is guaranteed.
The next tests for that view include remarks scheduled from Kevin Warsh at Jackson Hole on Aug. 28, U.S. employment data on Sept. 4, August CPI figures on Sept. 11, and the Federal Reserve’s Sept. 16 meeting. Hartnett’s note assigned a 35% probability to a rate hike at that meeting. It also flagged the Bank of Japan’s Sept. 18 decision, where the note placed the probability of a hike at 74%.
With federal debt nearing $40 trillion and corporate borrowing accelerating alongside the AI buildout, bond-market conditions are becoming a central constraint on the asset-price optimism that has defined much of 2026.
Rising U.S. debt and bond pressures? Explore how interest rates shape crypto opportunities and risk management in evolving markets.
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