Instability and high yields in the treasury bond market are causing tax policy makers to reevaluate fiscal decisions and revenue projections.
"The government's borrowing costs are quickly eating up a larger share of federal revenues," writes Andrew Lautz, the senior director of federal policy with the Tax Foundation.
"At the turn of the century, 11 cents of every tax dollar went to paying interest on the national debt. Today, it is 19 cents."
The observation is part of a Tax Foundation analysis of how higher treasury bond yields are affecting U.S. macroeconomics, fiscal policy, and the flow of federal tax revenues.
The Foundation points out, "the benchmark 10-year treasury interest rate, which averaged 4.3% in the early part of 2026, averaged nearly 4.6% from June through mid-August."
The three-basis point jump is considered large in a typically slow-moving market and caused Treasury Secretary Scott Bessent to double the size of buybacks of previously-issued debt otherwise known as "off the run" bonds.
The possibility of Bessent tapping the Treasury General Account, which functions as the country's checking account, to fund future buybacks has also been broached.
Higher bond yields trickles into higher borrowing costs for consumers which tightens discretionary spending and cuts into tax revenue.
"Less consumption and investment can mean less property tax revenue for municipalities, less sales tax revenue for states, and less income tax revenue for states and the federal government," said the Foundation.
Higher yields also affect fiscal policy as more funding is needed to service the national debt. The next debate over the height of the debt ceiling is scheduled for sometime next year.
A higher benchmark resonates with muni bond issuers.
"State and local governments who were trying to build a new school, build a new park, all of those are related to the cost of the borrowing that we have on our treasuries," said Brett Loper executive vice president of policy for the Peterson Foundation.
The ratio between total public debt and gross domestic product adds to the concerns.
According to the Federal Reserve Bank of St. Louis the ratio was 122.59% in the first quarter of 2026.
It topped 132% during the pandemic and has been headed north from the 30's since the early 1980s.
The Congressional Budget Office estimates that for each 1% rise in the federal debt-to-GDP ratio, long-run interest rates increase by 2 basis points.
"Munis are caught up in this higher rate dynamic," said Caleb Quackenbush, director for fiscal policy for Bipartisan Policy Center.
"Large levels of federal borrowing are exerting upward pressure on interest rates across the economy. To absorb a growing supply of federal debt, bond market investors demand higher yields in return."
Elevated yields will add to the financial burdens the states face next year when federal cuts to Medicaid and the Supplemental Nutritional Program begin to take effect.
Last week, Fitch Ratings addressed the global implications of higher yields combined with a higher debt ratio.
"Developed market sovereigns with high debt/GDP ratios and short average debt-maturity profiles are typically most exposed to a sustained increase in yields," said Fitch.
"Thirty-year bonds are a small share of government debt, and increasing issuance at shorter maturities helps slow the rise in interest costs, but comes at the cost of shorter average maturities, weakening overall funding profiles."
