Financial markets and investors are reacting to the rapidly growing U.S. national debt, which is approaching a record of $40 trillion, by requiring greater returns for those who invest in America’s debt obligations.

Yields on U.S. Treasurys have been elevated recently, in part due to the growth in debt, with the federal government projected to run a roughly $2.1 trillion budget deficit this fiscal year, according to the nonpartisan Congressional Budget Office (CBO).

Two recent Treasury auctions in the last week drew attention due to the yields reaching historic levels – the sale of 10-year notes cleared at a high of 4.683%, the highest in 19 years, while the 30-year bond auction stopped at 5.216%, a 25-year peak.

Demand from investors has remained steady despite the higher yields, as they navigate concerns over the growing debt, widening budget deficits and inflation – with the higher yields attracting investors.

The higher yields at last week’s auctions showed no sign of an abrupt decline in demand from domestic and foreign investors for Treasurys. Analysts also indicated there weren’t signs that so-called bond vigilantes, who are concerned with fiscal policy and inflation risks and demand higher yields to invest, are actively selling Treasurys.

Yields on U.S. debt are higher than those on the debt issued by other developed countries like Japan, contributing to the stronger demand for Treasurys.

Jim Barnes, director of fixed income at Bryn Mawr Trust in Pennsylvania said in a Reuters report that the “appetite for Treasurys is still there and it’s just a matter of – at what yield,” adding that the “10-year at close to 5% and the 30-year at multi-decade highs will attract more buyers for risk-free Treasurys.”

Treasurys are considered to be “risk-free” in theory, because the federal government is perceived as having little to no chance of entering into a formal default because of its ability to tax and control its money supply through the Federal Reserve. In practice, they do carry some risks for investors that owe to shifts in inflation and interest rates, despite the unlikely prospect of default.

Elevated yields on U.S. debt do pose a challenge for consumers, as the yield on the 10-year Treasury note is a key guide for mortgage rates and they typically move in tandem. 

Higher mortgage rates can make it harder for buyers to afford monthly payments and can discourage existing homeowners whose current mortgages are at lower rates from moving, while also weighing on construction activity.

Other types of consumer debt, including auto loans and other fixed-rate loans, also tend to rise with market rates, though there is a lag in the pass-through of the higher borrowing costs, and it’s less exact than in other types of consumer borrowing. Credit card rates are more closely linked to banks’ prime rates, which tend to follow the Fed’s monetary policy moves.

Higher yields on Treasurys can also contribute to bigger budget deficits – and in turn, a larger national debt – as the federal government’s debt service costs rise due to the higher yields.

A 10-year budget and economic outlook released by the nonpartisan Congressional Budget Office (CBO) earlier this year projected that the government’s net interest costs are projected to exceed $1 trillion in fiscal year 2026, amounting to about 3.3% of GDP and nearly 14% of federal spending this year.

Interest costs are forecasted to continue to rise over the next 10 years, with the CBO projecting the annual interest expense will rise to $2.1 trillion in fiscal year 2036, when it would amount to 4.6% of GDP and account for 19% of federal spending that year.

Reuters contributed to this report.