The federal government closed fiscal year 2026 on September 30 having paid $1.36 trillion in gross interest on its debt, according to Treasury data published in early October. That is 11.5 percent more than the same period a year earlier. It is $3.73 billion a day, every day, for 365 days.
The figure is not net interest, the budget measure that excludes what the government pays to its own trust funds. Net interest through August was $1.02 trillion. Gross interest is the number that captures the full cost of carrying the debt, including the transfers that flow internally between Treasury and Social Security and Medicare. Both numbers have crossed thresholds that were theoretical projections three years ago.
What the number compares to
Federal gross interest expense now exceeds what Washington transferred to the states for Medicaid in fiscal 2025. It rivals the discretionary defense budget. Among mandatory and interest outlays, it is the third-largest line item in the federal budget, behind Social Security and Medicare but ahead of everything else.
The rate driving the number has moved steadily upward. The average interest rate on total interest-bearing debt stood at 3.53 percent through the most recent Treasury reporting, up from 3.41 percent a year earlier. That rate reflects the stock of existing debt, much of it issued at lower rates, being rolled over at current ones. Ten-year Treasury notes were yielding 5.24 percent at the start of October. The gap between the average cost of existing debt and the rate on new issuance means the interest line will continue to rise even if the debt itself does not grow.
The Federal Reserve held its September meeting and raised the federal funds target range by a quarter point to 3.75 to 4 percent, unanimous at 12 to 0. Minutes released on October 7 showed most participants saw room for one further increase before year end. The October meeting is scheduled for the 27th. Recent data, including an inflation reading that put twelve-month PCE at 3.8 percent, has made another hike at October less certain, according to CNBC's reporting on the minutes.
The compounding problem
The debt crosses $101 billion in net new issuance in the first week of the fiscal year alone, based on Treasury's daily statements. The arithmetic compounds. Each dollar of new debt issued at current rates adds to an interest bill that is already running above any prior peacetime level in nominal terms and approaching historic highs as a share of revenue.
The bond market's read on duration has been central to this year's rate story. Thirty months of rates near three percent reshaped expectations in one direction; what has followed has reshaped them in another.
The interest line does not respond to the next budget negotiation. It responds to the rate at which old debt matures and is replaced by new, and to the level at which new debt is priced. At the current path, $1.36 trillion becomes the floor.
Topics marketsfederal budgetdebtinterest ratesfiscal policy
