Trump is facing a new inflation warning from the bond market, adding to
his midterm challenges
[June 01, 2026] By
JOSH BOAK
WASHINGTON (AP) — The world is getting more uptight about lending money
to President Donald Trump’s government — causing interest rates to climb
in ways that are worsening affordability pressures, hampering economic
growth and creating a new risk for Republicans in November’s midterm
elections.
The energy price spike triggered by the Iran war has seeped into the
price of bonds that help fund the U.S. government. Interest rates on a
10-year U.S. Treasury note are topping 4.44%, up from 3.95% before the
war started at the end of February. Average mortgage rates have climbed
to their highest levels in nine months, while auto sales are slumping.
The challenge is global in scale, as interest rates have risen for
multiple countries as the world has been adjusting to the prospect of
higher inflation, mounting questions about the sustainability of
government debt and a dramatic surge in investment in artificial
intelligence.
Trump has tried to assure Americans that he has a plan to trim the
roughly $1.8 trillion annual budget deficit. In the past, he has pointed
to revenue from tariffs, payments from foreigners for his “Gold Card”
visa, spending cuts made by the Department of Government Efficiency, and
faster economic growth. Last week, he said the fraud task force led by
Vice President JD Vance would be the key to unlocking massive savings.
“If he does really great, we’ll have a balanced budget without having to
do anything,” Trump said.
Economists say this is probably unrealistic
Economists say Trump’s strategies to meaningfully curb the deficit are
unlikely to deliver the promised results.
The cost of servicing the national debt has tripled since 2021 to more
than $1 trillion annually, said Jessica Riedl, a budget and tax fellow
at the Brookings Institution.
“President Trump signed a tax cut bill that will likely add $5 trillion
to 10-year deficits — and tariffs are offsetting only a small fraction
of those costs,” she said. “Budget deficits are still projected to soar
past $4 trillion annually within a decade under current policies.”
Deficits are expected to grow over the next decade as the costs of
Social Security and Medicare outstrip tax revenues.
The 10-year U.S. Treasury rate climbed as high as 4.67% in the middle of
May and has since eased as negotiations over the Iran ceasefire
continued — just as rates initially climbed in 2025 because of Trump's
“Liberation Day” tariffs and then began to decline once Trump backed off
the most extreme increases.
When Kent Smetters, faculty director of the Penn Wharton Budget Model,
broke down the math tied to rising 30-year Treasury yields, he estimated
that 60% of the increase had come from the expectation that America will
continue its outsized borrowing and the other 40% was tied to the
inflation driven by the Iran war and Trump’s tariffs.
Glenn Hubbard, a former chairman of the White House Council of Economic
Advisers during the George W. Bush administration, worries that the U.S.
may no longer have the same borrowing capacity as before to effectively
combat an economic crisis, such as the 2008 crash or the coronavirus
pandemic.
“I don’t think we have the space that we had in 2008 or 2020 to deal
with it,” said Hubbard, now a professor at Columbia University's
Business School. “Washington doesn’t seem to be full of ideas — good or
bad — to solve it.”
Interest rates are a concern for voters
Higher interest rates are giving Democratic candidates in the races to
determine control of the House and Senate another line of attack at a
time when voters are concerned about high costs for food and gasoline.
In Colorado’s fifth congressional district, Democrat Jessica Killin is
leaning into the message that the persistent deficits and higher
interest rates make it harder to buy or renovate a home, afford a new
car or manage credit card debt.
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Treasury Secretary Scott Bessent calls on a reporter in the James
Brady Press Briefing Room at the White House, Thursday, May 28,
2026, in Washington. (AP Photo/Jacquelyn Martin)
 “Things are already expensive,” said
Killin, an Army veteran who was a top aide to Doug Emhoff, the
former second gentleman. “We can already talk about gas, but the
cost of borrowing only makes that worse.”
Joe Reagan, an Army veteran also seeking the Democratic nomination,
said in an email that he is talking “a lot about fiscal stewardship”
in his campaign. “Every dollar spent paying interest is a dollar
that isn’t being invested in infrastructure, education, veterans’
services, or economic growth," he said.
They are challenging Republican Rep. Jeff Crank in a district that
their party views as a potential pickup. Killin said the deficit is
an example of how “Trump says one thing and does the opposite.”
In his March 2025 address to Congress, Trump declared that “in the
near future, I want to do what has not been done in 24 years:
balance the federal budget. We’re going to balance it.”
Crank, the Republican incumbent, did not reply to requests for
comment.
Cutting fraud is the new deficit strategy
The administration maintains that it is going to steadily reduce
budget deficits. As a share of the overall economy, the deficit last
year was lower than it was in 2024, though that drop depended in
part on tariff revenues that are subject to refunds after the
Supreme Court ruled them to be illegal.
Treasury Secretary Scott Bessent last week cited a report showing
that there was as much as $500 billion annually in fraudulent
government spending that could be eliminated, “so that would reduce
the deficit substantially.”
Bessent appeared to draw that conclusion from a 2024 report by the
Government Accountability Office that estimated there had been
between $233 billion to $521 billion each year in fraudulent
spending. But those numbers were drawn in part from the pandemic era
when the government borrowed heavily to stabilize the economy.
The White House and Treasury did not respond to questions about the
source of Bessent’s claims.
On deficits, Bessent told reporters at the White House that the
administration was essentially dealt a bad hand from former
President Joe Biden, a Democrat. “We inherited the worst budget
deficit in history — in history — when we were not in a recession or
not at war,” Bessent said.
Bessent had previously announced that the administration would aim
to reduce the annual deficit to 3% of overall U.S. gross domestic
product. It’s roughly double that percentage currently and Bessent
did not directly answer a question about the timeline for hitting
his target.
As of now, investors continue to buy shares in U.S. companies,
causing the stock market to increase in value in a sign of
confidence in America’s economic potential. But the increase in
interest rates also suggests that investors view the national debt
as a vulnerability for the U.S.
The financial markets might be able to inflict enough pain with
higher rates in order to compel political leaders to address the
systemic imbalances. Multiple economists said they expected that
markets would force the deficit issue before voters would.
Hubbard emphasized that the whole bond market system rests on the
trust that the debt will be repaid. He noted that the word “credit”
is linked to a Latin term that is also the root of the word creed
about a system of beliefs.
“That is what debt is about: I believe you will pay me back,”
Hubbard said. “That works until it doesn’t.”
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