Treasury yield hits quarter-century high as Trump bets on AI growth

Committee for a Responsible Federal Budget: balanced budget by 2036 needs 7.2% yearly growth

Republicans have repeatedly promised the US public that tax cuts would pay for themselves, firing up economic growth and filling the government’s coffers. From Ronald Reagan’s day on, Eduardo Porter, an economics journalist writing in The Guardian, argues that such tax cuts “inevitably increased the budget deficit.” The promise, he writes, is now back, “coated in a fine new layer of artificial intelligence pixie dust” — and, he concludes, “It will fail again.”

Treasury Secretary Scott Bessent has promised annual economic growth of 3% — a rate that, except for the rebound from the Covid pandemic, the US has achieved only twice this century, according to the analysis. President Donald Trump has said “we’re growing at a faster rate than we’ve ever grown before,” a pace he says will allow the government to “take care of the 40 trillion” in federal debt “over a period of time.”

After Trump met with top executives of AI firms at the White House on 29 September, Dario Amodei spoke to reporters while Trump and Meta CEO Mark Zuckerberg listened.

Yields have kept climbing even as the administration promised faster growth. The yield on the 10-year Treasury bond stood at 5.22%, according to Federal Reserve data — its highest level in almost a quarter century and more than a full percentage point higher than when Trump launched the war against Iran, according to the analysis. Porter writes that the war’s inflationary impact — which already led the Federal Reserve to raise short-term interest rates — is the most immediate cause of rising bond yields. He argues that the treasury market is also being squeezed by the country’s unbalanced finances: there is no realistic path for economic growth to generate the tax revenues needed to fix the US’s enormous and growing budget deficit, and investors are demanding more to cover the growing funding gap.

Porter writes that borrowing is likely to become more expensive still. Foreign central banks, which once reliably bought treasuries to build up foreign reserves and manage their exchange rates, have cut back on their exposure to US government debt, according to the analysis. The Treasury now relies largely on private investors seeking to turn a profit, and it competes for their money with the AI superscalers, which the analysis says are borrowing “hand over fist” to fund the buildout of datacenters to train their agents.

Porter describes the result as a “negative spiral,” as rising bond yields put additional pressure on the budget. Interest payments on the federal debt now consume 3.3% of GDP, up from an average of 2.1% over the preceding 50 years. Legislation is not easing the arithmetic: the One Big Beautiful Bill Act is estimated to add $4.7tn to the federal debt through 2035, and the deficit has already hit 6% of GDP, twice the size Bessent once promised. The Congressional Budget Office projected it will close in on 7% of GDP by 2033 — before Trump promised a $5,000 “dividend” to every US adult if Republicans kept control of Congress in the midterms. There is no realistic amount of growth, Porter argues, that can fill the fiscal hole that Trump keeps digging.

The Committee for a Responsible Federal Budget has calculated what closing the gap would require. Assuming the temporary tax cuts in Trump’s 2025 law are made permanent — an assumption, the analysis notes, that fits the historical pattern — and assuming the government does not recover the revenue lost when the Supreme Court struck down its national security tariffs, the Committee projects that a budget deficit of 3% of GDP by 2036 would require annual growth of 4.4% over the next decade. A balanced budget by then would require the economy to expand 7.2% per year.

Some economists are willing to contemplate scenarios in which artificial intelligence boosts growth to 15% per year by taking over much of the cognitive work usually performed by humans, the analysis notes. Such scenarios, it says, “do not appear likely.” Stabilizing the federal debt, the Committee calculated, would require average growth in total factor productivity of 2.5% per year over the next decade — a rate the US has reached only once since 1959, despite gains from electrification, the completion of the federal highway system, the telecommunications revolution, and the first wave of IT and automation.

Even if AI supercharged the economy, Porter argues, its impact on the government’s finances would be muted, because it would shift the fruits of growth from labor to capital, and the tax rate on capital today is only about half the tax rate on labor. Such a shift, he writes, “would probably call for massive government spending to sustain the livelihoods of the many workers left behind.”

The AI investments themselves carry risk. Stanford economist Hanno Lustig estimates that, for the owners of datacenters to break even on their AI investments — estimated to reach $1.43tn this year — revenue would have to grow by 45% on average every year for the next seven years, amounting to roughly 9.2% of GDP by 2032. A similar analysis by Jared Bernstein, former chair of Joe Biden’s Council of Economic Advisers, and Stanford economist Ryan Cummings concluded that the nation’s six superscalers — Google, Meta, Microsoft, Oracle, SpaceX and Amazon — would need additional revenues of $13.1tn to $18.7tn over the next 10 years just to pay for their massive investments in AI, roughly the same as their total revenues over the last 10 years.

Were those targets to be missed, Porter writes, it is hard to forecast precisely what would happen to financial markets. But, he says, it is “safe to say that it might complicate the task of trimming the budget deficit and financing the US’s vast public debt.”