Top Economist Warns US Is Headed for a ‘Fiscal Reckoning’ as $1.99 Trillion Deficit Pushes Interest Payments Above Defense Spending

The United States government recorded a budget deficit of $1.992 trillion for fiscal year 2026, with federal interest payments exceeding defense spending. Moody’s Analytics Chief Economist Mark Zandi stated this trajectory moves the country toward a “fiscal reckoning.”

Budget and Outlay Data

The Treasury Department reported that the $1.992 trillion deficit for the period ending Sept. 30 resulted from $7.396 trillion in total outlays and $5.403 trillion in total receipts. Zandi noted the deficit represents more than 6% of the Gross Domestic Product. The government spent $1.052 trillion on net interest during the fiscal year. This outpaced the $965 billion spent on national defense.

The primary budget deficit, which excludes interest payments, reached nearly 3% of GDP. Zandi called this figure “eye-popping.” He stated that because unemployment remains low, the primary budget should be in surplus or balanced. He attributed the $1 trillion in interest payments to the “ballooning debt load.”

With all eyes on the inflation statistics released this week, little attention was paid to the Treasury statement released on Friday. It showed the nation racked up a nearly $2 trillion budget deficit in just-ended fiscal year 2026. That’s more than 6% of GDP. pic.twitter.com/v7MUVckAK9

— Mark Zandi (@Markzandi) October 18, 2026

Treasury Yields and Market Reaction

Zandi observed that global investors “appear to be demanding a higher rate to compensate for the mounting risk.” The 10-year Treasury yield rose by about one percentage point this year. Zandi stated this increase is among the largest of any major economy. He noted that nations with the heaviest interest burdens experienced the biggest yield increases.

Cycle of Debt

Zandi cautioned that a “vicious cycle threatens to take hold” within the economy. He explained that higher rates add to the debt load and interest payments, which subsequently pushes rates higher.

He acknowledged that other countries face similar issues, but he emphasized the U.S. is the most important because U.S. Treasuries act as the global benchmark.

How Have the Bond and Stock Markets Performed?

At the last check, the 30-year Treasury bond yielded 5.41%, the 10-year Treasury bond was at 5.07%, and the two-year bond was at 4.73%.

The primary ETF specifically tracking the long end of the U.S. Treasury yield curve—including the 30-year benchmark bond—is the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT), which closed 0.10% higher at $80.05 on Friday. It was down 8.89% year-to-date, down 1.03% over the last month and 12.36% over the last year.

The S&P 500 index has advanced 11.68% year-to-date. Similarly, the Nasdaq Composite index was up 12.50%, and the Dow Jones gained 7.48% YTD.

On Friday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed lower. SPY fell 1.11% to $763.25, while QQQ declined 2.50% to $709.80. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), ended 0.38% lower at $519.10.

In premarket trading on Monday, SPY was up 0.64%, QQQ rose 1.30%, and DIA advanced by 0.027%.

Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.

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