President Donald Trump faces mounting pressure as rising US borrowing costs, driven by inflation fears linked to the Iran conflict and his tariff policies, threaten economic growth and create a new vulnerability for Republicans in the November midterm elections.
Yields on 10-year US Treasury notes have climbed above 4.44%, up from 3.95% before the conflict with Iran began in late February. Mortgage rates have hit their highest level in nine months, and auto sales have weakened. The trend is not confined to the United States; borrowing costs have increased in several countries as investors adjust to higher inflation expectations, concerns over government debt sustainability, and growing investment in artificial intelligence.
Deficit Reduction Plans Face Skepticism
Trump has said his administration has a plan to reduce the roughly $1.8 trillion (€1.5 trillion) annual budget deficit, pointing to tariff revenues, payments from the proposed "Gold Card" visa programme, spending cuts by the Department of Government Efficiency, and stronger economic growth. He has also cited a fraud task force led by Vice President JD Vance. "If he does really great, we'll have a balanced budget without having to do anything," Trump said.
Economists are skeptical. Jessica Riedl, a budget and tax fellow at the Brookings Institution, noted that the cost of servicing US government debt has risen sharply since 2021 to over $1 trillion (€860 billion) a year. "President Trump signed a tax cut bill that will likely add $5 trillion (€4.3 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 (€3.4 trillion) annually within a decade under current policies."
The yield on the 10-year Treasury note rose as high as 4.67% in mid-May before easing as ceasefire negotiations involving Iran progressed. Yields had also risen earlier in 2025 following Trump's "Liberation Day" tariff announcements, before declining when the administration scaled back some proposed increases. Kent Smetters, faculty director of the Penn Wharton Budget Model, estimated that about 60% of the rise in 30-year Treasury yields reflected expectations of continued high US government borrowing, while 40% was linked to inflationary pressures from the Iran conflict and tariffs.
Glenn Hubbard, who chaired the White House Council of Economic Advisers under President George W. Bush, expressed concern that the US may no longer have the same borrowing capacity to combat an economic crisis. "I don't think we have the space that we had in 2008 or 2020 to deal with it," Hubbard said. "Washington doesn't seem to be full of ideas — good or bad — to solve it."
Interest Rates Become a Midterm Issue
Rising interest rates have entered the debate ahead of the midterms, as cost-of-living concerns remain a key voter issue. In Colorado's 5th Congressional District, Democratic candidate Jessica Killin argued that persistent deficits and higher interest rates make it harder for households to buy homes, purchase vehicles, and manage credit card debt. "Things are already expensive," said Killin, an Army veteran and former aide to Doug Emhoff. "We can already talk about gas, but the cost of borrowing only makes that worse."
Joe Reagan, another Democratic candidate, said fiscal policy featured prominently in his campaign. "Every dollar spent paying interest is a dollar that isn't being invested in infrastructure, education, veterans' services, or economic growth," Reagan said. Both candidates are challenging Republican Representative Jeff Crank in a district Democrats see as a potential gain. Crank did not respond to requests for comment.
In his March 2025 address to Congress, Trump declared, "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." The administration points to fraud reduction efforts. Treasury Secretary Scott Bessent cited a report suggesting up to $500 billion (€429 billion) in fraudulent government spending could be eliminated annually. "So that would reduce the deficit substantially," Bessent said. His remarks referenced a 2024 Government Accountability Office report estimating annual fraudulent spending between $233 billion (€205 billion) and $521 billion (€458 billion), though those estimates included pandemic-era emergency spending.
Bessent argued the administration inherited an unusually large budget deficit from former President Joe Biden. "We inherited the worst budget deficit in history — in history — when we were not in a recession or not at war," he told reporters. The White House and Treasury Department did not respond to requests for clarification on Bessent's estimates.
