The US economy is continuing to grow faster than the cost of servicing its debt, but rising Treasury yields are increasing the risk of a debt spiral if that advantage disappears.
Inflation-adjusted growth has been running at about 2%, while nominal growth is above 6%. That remains higher than the 5.16% yield on the 10-year Treasury, which has risen by more than a percentage point since the war in Iran began.
The gap has helped the economy absorb the impact of Donald Trump’s tariffs and the conflict in Iran, while continuing to expand at a robust pace. Federal Reserve policymakers acknowledged the strength of the economy when they raised interest rates earlier this month to contain inflation.
But higher borrowing costs are placing a growing burden on the roughly $40 trillion of US debt. The danger is that growth could slow below the rate at which the government must refinance its obligations, allowing debt to rise faster than the economy.
A recent measure of US business activity for September reached a five-year high, suggesting that growth could accelerate in the third quarter. Much of the momentum has been linked to the rapid expansion of artificial intelligence infrastructure.
Capital spending by Alphabet, Amazon, Microsoft, Meta, Oracle and SpaceX is projected to reach $870 billion this year, up from $470 billion in 2025. S&P Global estimated last month that spending by the major cloud-computing companies could exceed $1.3 trillion in 2027.
The investment is also benefiting companies outside the technology sector. Industrial groups including Caterpillar and GE have gained from demand created by the construction of data centres.
“The breadth and magnitude of the AI investment impulse spilling over to other sectors is as surprising as it is extensive,” Jonathan Pingle, an economist at UBS, wrote in a note. “The demand impulse from AI appears to be spilling over to help create demand for capex outside of tech.”
Government spending is providing another source of support. The federal budget deficit is running at about $2 trillion a year, with much of the money raised through debt sales reaching consumers through entitlement payments and subsequently supporting company profits and share valuations, according to Research Affiliates.
However, some Wall Street analysts have warned that the AI boom could falter, depriving the US economy of one of its strongest sources of growth. Concerns over rogue AI systems and the possibility of the technology causing catastrophic harm have also prompted calls for development to be slowed, potentially reducing investment.
Ruchir Sharma, chairman of Rockefeller International, has said the bubble could burst if the 10-year Treasury yield moves decisively above 5%. He argued that such a level would signal a period of tighter monetary conditions in which large AI projects would become more difficult to finance.
A yield above 5% would also move closer to nominal economic growth, making the US debt position more difficult to sustain. The Committee for a Responsible Federal Budget has repeatedly warned that growth could eventually fall behind the cost of borrowing.
“With interest rates on new Treasury bonds and notes at around 5% and medium-term nominal economic growth expected to be closer to 4%, the U.S. is entering a debt spiral,” the budget watchdog said. “This could lead to a fiscal crisis, which could result in exploding unemployment rates, crashing asset values, surging inflation, falling incomes, sharp and unexpected increases in taxes and cuts in government support, or some combination.”
Slower growth would not necessarily bring yields down. Other heavily indebted countries and major AI companies are competing for investors’ money, forcing Treasury auctions to offer attractive returns, while wars, trade disputes and natural disasters are being treated as signs of a more unstable global environment rather than isolated shocks.
The Federal Reserve’s response to inflation remains a crucial uncertainty. Ed Yardeni, a veteran Wall Street analyst, said investors who had previously pushed bond yields above nominal growth to slow the economy could do so again if the central bank failed to bring inflation under control.
“They haven’t done that so far. The risk is that they will do that if the Fed fails to subdue inflation,” Mr Yardeni wrote.
