US deficits near WWII levels as $39 trillion debt tests bond market

The US is running a fiscal deficit unseen since World War Two during a period of economic growth, leaving the government with no fiscal buffer when the next downturn arrives.

The US government is borrowing at a pace not seen since World War Two while the economy grows, pushing the 10-year Treasury yield to 4.56% and draining demand for new debt.

"We have debt as a share of GDP at levels you'd have to go back to World War Two to see, with very large deficits in an economy that is in good shape," Conrad DeQuadros, head of economics at Citi Wealth, said on Bloomberg Businessweek Daily.

US public debt stood at roughly $39.39 trillion as of July 6, growing by about $100,584 per second and adding $3.17 trillion over the past year alone. The 10-year Treasury yield sits at 4.56%, in the 91.6th percentile of its 12-month range, while the 10Y-2Y spread has collapsed to 0.36% from 0.74%, suggesting bond investors are pricing in slower growth. A $22 billion auction of 30-year bonds on July 9 drew a yield of 5.058%, the highest since 2007. Gold slipped 0.3% to around $4,111 per ounce as higher yields raised the opportunity cost of holding the non-yielding metal, while Bitcoin held near $64,362.

The combination of record debt issuance and waning investor appetite threatens to raise borrowing costs across the economy. Cover ratios for corporate bonds tied to AI infrastructure spending — a key source of demand — have fallen to 2x in July from 5x in February, according to Apollo Global Management, suggesting companies from Meta Platforms to SpaceX will face higher rates to fund their expansion.

Real GDP grew 2.1% in the first quarter of 2026, following a 4.4% reading in the third quarter of 2025. The economy is expanding, yet the Treasury's fiscal year-to-date withdrawals of $30.13 trillion exceed deposits of $30.02 trillion, and the Treasury General Account has drawn down to $783 billion from $919 billion on July 1. The Federal Reserve held rates at 3.50% to 3.75% in June, with minutes revealing a split on further hikes under Chair Kevin Warsh, leaving little room for the central bank to ease the government's refinancing burden.

The last time the US ran deficits of this magnitude during peacetime growth was in the 1940s, when debt-to-GDP peaked above 100 percent after wartime mobilization. That buildup was followed by two decades of fiscal consolidation and economic expansion that gradually reduced the ratio. Today, with core PCE at the 90.9th percentile of its range, the Fed has limited cover to cut rates even if growth slows.

The AI Debt Factor

The bond market's growing resistance extends beyond sovereign debt. Morgan Stanley estimates that AI-related global debt issuance totaled $236 billion as of May 31, four times the amount one year earlier, and expects it to reach $570 billion by the end of 2026. Meta Platforms, Alphabet, Amazon and Microsoft alone are expected to spend a combined $700 billion on capital expenditures this year, much of it directed at AI data centers.

But investor appetite for this debt is cooling. Cover ratios for hyperscaler bonds dropped to 2x in July from 5x in February, according to Apollo Global Management. SpaceX, which carries $29 billion in long-term debt, saw its bonds trade at a 1.62-percentage-point premium over Treasuries, a spread that places them in non-investment grade territory.

What Happens Next

If the Treasury must pay higher yields to place its debt, the cost of servicing the existing $39 trillion stack compounds with every rollover. DeQuadros framed the risk directly: if deficits are this large when the economy is growing, what happens when the next downturn arrives and spending has to increase? The fiscal shock absorber is already exhausted.

This article is for informational purposes only and does not constitute investment advice.