Forget the shutdown. America’s real fiscal worry is rising bond yields

livemint.com:

shut down the government—and once again the fight is a costly addition to the country’s economic problems. If Congress and the Biden administration do not strike a deal to fund the federal government, from October 1st it may need to furlough employees and freeze non-essential payments. House Republicans cannot even agree among themselves about what spending cuts to demand of the Senate and the White House, with hardliners seeking to sabotage a bipartisan deal struck in the summer.

Yet the reckless brinkmanship in Washington is not even the main threat to America. It concerns only the roughly 25% of America’s budget that is left when you set aside “mandatory" spending, such as public pensions and health care. The country’s budget problems are far broader—and they are getting worse by the month.

To see why, you need to look not to Washington but to worrying movements in bond markets. The annual cost to America’s government of borrowing for ten years has risen to 4.6%, the highest since 2007. Bond yields have been trending up since the spring, as investors have begun to anticipate that the Federal Reserve will keep interest rates “higher for longer" to keep inflation down—the opposite of the monetary-policy paradigm that prevailed before the pandemic.

But whereas the last time yields were this high the federal government had debts of 35% of GDP, today the ratio is 98%. Rising interest rates are therefore nearly three times as painful for the budget. As a result, the latest official projections show that this year the federal government will spend 2.5% of GDP on servicing its debts, a doubling in a decade.