The federal government accumulated a $1.97 trillion deficit through the first 11 months of fiscal 2026 as debt-servicing costs surpassed $1 trillion and long-term Treasury yields climbed to levels not seen in years.

By yourNEWS Media Newsroom.

The U.S. government’s fiscal-year deficit reached $1.97 trillion through August, leaving Washington just short of the $2 trillion mark with one month remaining in fiscal 2026 as mounting interest costs and elevated bond yields intensify scrutiny of the nation’s finances.

The Treasury Department reported Friday that the government recorded a $167 billion deficit in August, sharply below the roughly $404 billion economists had expected. The monthly shortfall fell 61% from July’s $432 billion deficit and was 52% below the $345 billion recorded in August 2025.

Part of that apparent improvement resulted from the calendar rather than a fundamental change in federal finances. Because Aug. 1 fell on a Saturday, some Social Security, Medicare and other payments normally made in August were shifted into July. After adjusting for those timing changes, Treasury calculated an August deficit of approximately $248 billion, $7 billion larger than the comparable figure a year earlier.

Through the first 11 months of the fiscal year, federal spending totaled about $6.81 trillion while revenue reached approximately $4.85 trillion. The resulting $1.97 trillion deficit already exceeds the entire $1.775 trillion deficit recorded during fiscal 2025, although September traditionally benefits from corporate tax deadlines and can substantially affect the final annual total.

August itself brought $360 billion into federal coffers while spending totaled $527 billion. Social Security represented the month’s largest expenditure at approximately $141 billion, followed by about $86 billion in net interest, $81 billion in health spending and $72 billion for national defense.

The broader fiscal picture is increasingly being shaped by the cost of financing the national debt.

Net interest spending surpassed $1 trillion during the first 11 months of fiscal 2026, while year-to-date interest costs increased by $143 billion, or 13%, from the comparable period a year earlier. The Congressional Budget Office projects net interest expenses to continue rising rapidly over the coming decade as the government carries a larger debt load and refinances maturing obligations at higher rates.

The national debt has meanwhile crossed the $40 trillion threshold, creating additional sensitivity to movements in Treasury yields. Higher rates mean newly issued debt and securities being refinanced generally become more expensive for the federal government to service.

Those borrowing costs moved higher again this week. The benchmark 10-year Treasury yield finished Friday near 4.97%, while the 30-year yield ended around 5.36%, levels not seen for years.

“Yields have followed a two-steps-forward, one-step-back path for much of the year,” Adam Turnquist, chief technical strategist at LPL Financial, said. “Over the last month, however, rates appear to have traded the stairs for the elevator.”

Treasury Secretary Scott Bessent has attempted to improve conditions in the government bond market partly by expanding Treasury’s debt-buyback program.

Treasury increased the maximum size of its Sept. 10 operation to $6 billion for securities with roughly 10 to 20 years remaining until maturity, tripling the size of the previous comparable operation. The government ultimately repurchased approximately $5.19 billion of those securities, below the maximum amount offered.

The buybacks are intended primarily to improve liquidity in older Treasury securities rather than erase federal debt. Treasury purchases less-liquid outstanding securities while continuing to issue new debt needed to finance government operations.

The expanded operation failed to produce a sustained drop in borrowing costs. The 10-year yield continued pressing toward 5%, while long-term rates remained near their highest levels in years.

A closely watched Treasury auction nevertheless demonstrated strong demand at those higher yields.

Treasury sold $22 billion of 30-year bonds on Sept. 10 at a high yield of 5.308%, the highest auction yield on the maturity since 2001. Indirect bidders — a category that includes foreign institutions, central banks and investment managers — took approximately 79% of the offering, while primary dealers were left with only about $485 million, or 2.2%.

That unusually small dealer allocation indicated that end investors absorbed nearly all the bonds despite the historically high borrowing rate. The auction attracted approximately $57.5 billion in bids, producing a bid-to-cover ratio of 2.61.

The government’s fiscal position has also entered the political debate ahead of November’s midterm elections.

President Donald Trump announced at the Republican midterm convention in Dallas that he wants to provide a $5,000 payment to adult American citizens if Republicans retain control of both chambers of Congress. Such a program would require congressional authorization and has been estimated to cost more than $1 trillion depending on eligibility rules.

Trump reaffirmed the proposal in a Sept. 11 Truth Social post.

“When I say something, I mean it! The $5,000 Dividend will happen because the People of our Country deserve it,” Trump said.

The proposal has added another fiscal consideration for investors already focused on federal borrowing requirements, inflation and the Treasury market. Trump and administration officials have pointed to tariff revenue and economic growth as possible funding sources, while analysts have estimated that tariff collections at current levels would fall well short of covering the full cost of universal $5,000 payments.

Inflation is simultaneously complicating the interest-rate outlook.

Consumer prices increased 3.4% from a year earlier in August, while core inflation, which excludes food and energy, eased to 2.4%. Rising gasoline and other energy costs contributed heavily to the headline increase.

The data strengthened expectations that the Federal Reserve could raise its benchmark interest rate by a quarter percentage point at its Sept. 15-16 meeting. Futures markets late Friday were assigning roughly an 85% to 87% probability to such an increase, up sharply from expectations before the latest inflation reports.

Higher Federal Reserve rates do not translate mechanically into identical increases in long-term Treasury yields, but persistent inflation, expectations for tighter monetary policy, heavy government borrowing and concerns about the federal fiscal outlook have all contributed to pressure across the bond market.

“Momentum indicators continue to point toward higher yields,” Turnquist said.

The combination leaves the federal government confronting two related challenges: borrowing nearly $2 trillion more than it has collected so far this fiscal year while paying increasingly large sums simply to service previously accumulated debt.

With net interest already above $1 trillion for the fiscal year to date, total federal debt above $40 trillion and the 10-year Treasury yield approaching 5%, the final month of fiscal 2026 will close against a substantially more expensive borrowing environment than Washington faced during the low-rate years that preceded it.

Original article