Trump is facing a new inflation warning from the bond market, adding to his midterm challenges

WASHINGTON (AP) — The world is getting more uptight about lending money to President Donald Trump’s government — causing interest rates to climb in ways that are worsening affordability pressures, hampering economic growth and creating a new risk for Republicans in November’s midterm elections.

The energy price spike triggered by the Iran war has seeped into the price of bonds that help fund the U.S. government. Interest rates on a 10-year U.S. Treasury note are topping 4.44%, up from 3.95% before the war started at the end of February. Average mortgage rates have climbed to their highest levels in nine months, while auto sales are slumping.

The challenge is global in scale, as interest rates have risen for multiple countries as the world has been adjusting to the prospect of higher inflation, mounting questions about the sustainability of government debt and a dramatic surge in investment in artificial intelligence.

Trump has tried to assure Americans that he has a plan to trim the roughly $1.8 trillion annual budget deficit. In the past, he has pointed to revenue from tariffs, payments from foreigners for his “Gold Card” visa, spending cuts made by the Department of Government Efficiency, and faster economic growth. Last week, he said the fraud task force led by Vice President JD Vance would be the key to unlocking massive savings.

“If he does really great, we’ll have a balanced budget without having to do anything,” Trump said.

Economists say this is probably unrealistic

Economists say Trump’s strategies to meaningfully curb the deficit are unlikely to deliver the promised results.

The cost of servicing the national debt has tripled since 2021 to more than $1 trillion annually, said Jessica Riedl, a budget and tax fellow at the Brookings Institution.

“President Trump signed a tax cut bill that will likely add $5 trillion to 10-year deficits — and tariffs are offsetting only a small fraction of those costs,” she said. “Budget deficits are still projected to soar past $4 trillion annually within a decade under current policies.”

Deficits are expected to grow over the next decade as the costs of Social Security and Medicare outstrip tax revenues.

The 10-year U.S. Treasury rate climbed as high as 4.67% in the middle of May and has since eased as negotiations over the Iran ceasefire continued — just as rates initially climbed in 2025 because of Trump's “Liberation Day” tariffs and then began to decline once Trump backed off the most extreme increases.

When Kent Smetters, faculty director of the Penn Wharton Budget Model, broke down the math tied to rising 30-year Treasury yields, he estimated that 60% of the increase had come from the expectation that America will continue its outsized borrowing and the other 40% was tied to the inflation driven by the Iran war and Trump’s tariffs.