Moody's Zandi Sees 'Vicious Cycle' Risk as U.S. Debt Hits $40 Trillion

By Amara Osei

The U.S. national debt has passed $40 trillion, and Moody's top economist Mark Zandi says global investors are already charging Washington more to borrow because of it.

Zandi wrote in a note late Sunday that he sees the early signs of a debt spiral. The warning landed as the U.S. Treasury confirmed a $2 trillion deficit for the fiscal year ending in October. More than half of that deficit went to interest payments alone.

"But arguably most significant is that global investors see all this and appear to be demanding a higher rate to compensate for the mounting risk," Zandi wrote. "The 10-year Treasury yield is up about a percentage point this year, among the biggest increases of any major economy, and the countries with the heaviest interest burdens have generally seen the biggest increases."

That dynamic is the problem. Zandi spelled out the mechanism in plain terms: "A vicious cycle threatens to take hold, with higher rates adding to the interest payments and debt load, which in turn pushes rates up even more."

Why the debt-to-GDP ratio matters more than the headline number

Policy optimists have long dismissed the risk of a U.S. fiscal crisis — the point at which the debt burden grows so large that repayments become impossible to finance or force damaging economic consequences. Their argument runs on two tracks.

First, the U.S. remains the largest economy on the planet, so a $40 trillion debt load arguably looks different than it would elsewhere. Second, borrowing advocates note that interest rates are elevated across many markets. The U.S. doesn't stand out, they say, so there's no reason to single it out.

Debt hawks counter that just because no crisis has happened yet, it doesn't mean one won't happen at all. Their focus isn't the raw value of public debt but the debt-to-GDP ratio — the measure of how much the government borrows to sustain spending on services and operations relative to economic growth, and therefore how comfortably it can repay.

The U.S. ratio now stands at 126%.

What would a fiscal crisis actually look like?

The answer depends on which economist you ask.

Bridgewater Associates founder Ray Dalio believes America will suffer an economic "heart attack." Kent Smetters, professor of business economics and public policy at the University of Pennsylvania's Wharton School, previously told Fortune he believes the U.S. will inflate its way out of a crisis.

Zandi's version is slower and market-driven: investors demand higher yields, interest costs climb, the debt load grows, and rates rise again. The first tremors, in his reading, are already visible in the Treasury market.

Is this a global problem or an American one?

The U.S. isn't the only advanced economy wrestling with expensive debt.

The IMF said in a note last week that long-term sovereign yields have "increased sharply" for a number of major advanced economies. Between February and September of 2026, the G7's average 10-year government bond yield rose by more than 1 percentage point, reaching its highest level in nearly two decades.

Treasury Secretary Scott Bessent has leaned on that context. He suggested higher U.S. yields would be a cause for concern only if they were "idiosyncratic" — that is, moving against the global trend rather than with it.

Zandi doesn't buy the reassurance. He concedes other countries are approaching their own fiscal reckonings, but argues scale and role matter more than direction. "The U.S. isn't the only country approaching a fiscal reckoning, but given that Treasuries are the global benchmark, it is far and away the most important one," he wrote.

That's the so-what for markets. Treasuries price the world's risk-free rate. If the U.S. enters the cycle Zandi describes, investors won't just reprice American debt — they'll reprice the benchmark every other asset hangs on. Watch the 10-year yield: another percentage-point move like this year's would push interest costs, and the deficit, materially higher again.