US debt interest costs hit record $723B, now the second-largest federal spending category

The US government spent $723 billion just on interest payments during the first eight months of fiscal year 2026. Not on roads, not on schools, not on defense. Just on servicing the debt it already owes.

That figure, reported by the Peter G. Peterson Foundation, makes net interest the second-largest category of federal spending. It now trails only Social Security, having leapfrogged both defense and Medicare. The number represents an 8.8% jump from the $664 billion recorded over the same period in FY2025.

The numbers in context

The Congressional Budget Office projects full-year net interest for FY2026 will exceed $1 trillion. For perspective, the full-year figure for FY2025 came in at $970 billion.

Look further out and the picture gets grimmer. The CBO anticipates interest costs could more than double to $2.1 trillion by FY2036. At that point, debt servicing alone could consume roughly a quarter of all federal revenue.

Net interest costs have nearly tripled since FY2020 levels. That makes them the fastest-growing major category in the federal budget, outpacing everything from healthcare spending to military outlays.

How we got here

A combination of massive pandemic-era borrowing, persistent inflationary pressures, and the Federal Reserve’s aggressive rate-hiking cycle from 2022 through 2024 created a perfect storm for debt servicing costs. As rates climbed, the cost of rolling over existing debt and issuing new bonds ballooned. As older, cheaper debt matures and gets replaced with new issuance at higher yields, the average interest rate on outstanding debt creeps upward.

Data tracked by the US Treasury Monthly Treasury Statement, CBO baselines, the Committee for a Responsible Federal Budget, and the Peter G. Peterson Foundation all point to the same conclusion: the compounding dynamics of higher rates on an ever-larger debt pile are producing a feedback loop that’s increasingly difficult to break.

What this means for investors

When the government needs to allocate an ever-larger share of revenue to interest payments, the political math around spending cuts and tax increases changes. Congress faces a narrowing set of options: reduce discretionary spending, raise taxes, or continue borrowing at increasingly punishing rates.

For bond investors, rising debt issuance to cover both deficits and interest payments increases the supply of Treasuries. More supply, all else equal, pushes yields higher. Higher yields mean lower bond prices. It also means the government’s borrowing costs increase further, creating the kind of self-reinforcing cycle that keeps fiscal hawks up at night.

For equity markets, higher sustained interest rates compress valuations, increase corporate borrowing costs, and reduce the present value of future earnings.

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