U.S. government is spending $88 billion a month in interest on national debt—equal to spending on defense and education combined

Net interest on U.S. public debt totaled $529 billion in the first six months of FY2026, up $33 billion (7%) year-on-year and roughly equal to combined DoD ($461B) and Education ($70B) spending, implying about $88B per month. Total U.S. national debt is about $39 trillion; receipts rose to $2.5 trillion (+$223B YoY) while outlays increased to $3.65 trillion (+$84B), producing a six-month deficit of $1.2 trillion (improved $140B YoY) and implying more than $2 trillion of borrowing for the full fiscal year. The CBO attributes higher service costs to larger debt and higher long-term rates (partially offset by lower short-term rates); March borrowing was $163 billion (+$3B vs prior March).

Analysis

Growing fiscal financing needs are an under-appreciated structural supply shock to duration markets: when the Treasury must issue more paper to fund policy, the marginal buyer set and term premium change, and that tends to lift long-end yields even if short policy rates are stable. Expect the mechanical effect to show up first in a steeper curve and in periodic outsized auction volatility (2-6 week windows around large nominal/real coupon reopenings), not as a smooth, gradual repricing.

Second-order corporate-credit and mortgage transmission will matter more than headline Treasury moves. Heavy Treasury issuance tends to crowd out the highest-quality corporate and MBS buyers, pushing absolute yields on investment-grade corporates and primary-mortgage rates higher; that produces asymmetric downside for long-duration corporates and mortgage REITs while providing a pickup to net-interest-margin sensitive banks if the curve steepens enough.

Policy and foreign demand are the critical reversals: a credible fiscal consolidation plan, resumption of large-scale foreign sovereign buying, or a Fed pivot to easier stance could compress term premium and reverse moves within 3-12 months. Conversely, political stalemate around budget mechanics or a maneuver that forces larger-than-expected bill/nominal note supply will amplify volatility and create multi-quarter performance dispersion across rate-sensitive assets.

Key Decisions for Investors

• Short 10y Treasury futures (CME ZN) sized as 1-2% of NAV with 3-6 month horizon — target a 20-35bp rise in 10y yield (approx. 1.8-3.2% notional P&L move) and place a stop if yields fall >20bp; this is a directional hedge against term-premium-driven repricing around the next big coupon calendar.
• Buy short-maturity TIPS via STIP (iShares 0-5yr TIPS ETF) for 6-18 months as an asymmetric hedge: limited duration sensitivity but direct protection if inflation expectations re-price due to fiscal monetization fears; size 1-3% NAV — expected payoff if breakevens widen by 15-30bps.
• Pair trade: long KRE (SPDR Regional Banking ETF) / short XLU (Utilities ETF) with a 3-9 month horizon — overweight regional banks to capture NIM expansion from a steeper curve, short utilities to hedge duration drag. Use equal notional sizing and a tolerance stop if the 2s10s flattens by >25bps (pair historically shows 10-20% relative move in favorable scenarios).
• Buy a protective put spread on LQD (e.g., 3-6 month put spread ~3-7% OTM) to express widening investment-grade credit spreads without full short-credit exposure. Keep premium below 1% of NAV for a payoff that can be 4x-8x if IG spreads reprice materially due to Treasury crowding-out.