Fitch Highlights Risk of U.S. Sovereign Rating Downgrade as Developed Markets' Debt Interest Surpasses $3.3 Trillion

Against the backdrop of the U.S. federal deficit expanding to $1.99 trillion in fiscal year 2026 and net interest payments reaching a record $1.05 trillion, Fitch Ratings has explicitly named the risk of a downgrade to the U.S. sovereign rating.

According to data released by the U.S. Treasury on October 16, for the fiscal year ending September 30, 2026, the U.S. federal government’s fiscal deficit reached $1.99 trillion, a year-on-year increase of about 12%, marking the largest annual deficit since 2021 and the fourth consecutive year at this elevated level.

The rise in U.S. Treasury yields has led to a surge in interest payments, becoming a key factor in the expanding fiscal deficit. In fiscal year 2026, the U.S. federal government’s net interest payments increased by $81.4 billion year-on-year, reaching a record $1.05 trillion, making it one of the government’s three largest expenditure items.

Fitch anticipates that by the end of the year, total government debt among developed markets will surpass $75 trillion; according to International Institute of Finance (IIF) data, even before the current bond sell-off, annual interest payments by wealthy nations have already exceeded $3.3 trillion, which is greater than total global defense or AI investment expenditures.

Fitch has listed the U.S., France, and the U.K. as countries where debt sustainability is under threat and sovereign ratings face the risk of downgrade. It also made it clear: if high fiscal deficits, the ratio of interest payments to fiscal revenue, and the ratio of government debt to GDP continue to deteriorate, while lacking a credible medium-term fiscal adjustment plan, the U.S. sovereign rating will face downward pressure.

Fitch Ratings Chief Economist Brian Coulton attributes the current surge in bond market yields to a combination of supply and demand factors. He noted:

The duration of the energy shock has exceeded previous expectations, changing market views on monetary policy and making central banks in various countries more alert to second-round effects of inflation.

It's worth noting that not only are short- and medium-term bonds under pressure, but 30-year ultra-long-term Treasury yields are also rising in tandem, while medium- to long-term inflation expectations remain broadly stable. Brian Coulton stated:

This indicates that broader supply and demand factors are also at play.

On the supply side, pressure mainly stems from the persistent expansion of fiscal deficits by governments worldwide. The International Monetary Fund pointed out in its October World Economic Outlook that the net borrowing by advanced economies will reach 5.2% of GDP this year, the highest since 2021.

U.S. Treasury data shows that for the fiscal year ending September 30, 2026, the U.S. federal government's fiscal deficit hit $1.99 trillion, up about 12% year-on-year, the largest since 2021 and the fourth consecutive year at a high level; net interest payments were up $81.4 billion year-on-year, reaching a record $1.05 trillion, now one of the government’s top three expenditures.

Meanwhile, large-scale financing by tech giants is directly competing with sovereign bonds for market capital. Brian Coulton noted:

Amid the AI investment boom, major tech cloud companies have started massive financing initiatives to support data center and IT infrastructure construction, creating competition for funds in the debt market versus sovereign bonds.

Goldman Sachs once forecast that the five major hyperscale cloud providers—Google, Amazon, Meta, Microsoft, and Oracle—would issue about $250 billion in bonds in 2026, rising further to $400 billion in 2027. Brian Coulton concluded:

With rising investment demand and savings not growing in tandem, this puts upward pressure on real interest rates in the U.S. and globally.

Fitch Ratings’ Head of Western European Sovereign Ratings and Senior Director Federico Barriga-Salazar believes that rising financing costs pose a challenge for all advanced markets, especially those with high debt levels and a substantial concentration of bonds maturing, with France, the U.S., and the U.K. being hit hardest.

IMF Managing Director Kristalina Georgieva recently warned that advanced economies have become the “most serious offenders” in terms of debt problems. As debt servicing costs continue to climb, fiscal space for governments is further squeezed, limiting their ability to provide cost-of-living support to citizens.

A country's ability to withstand fiscal shocks largely depends on the average remaining maturity of its outstanding debt. Federico Barriga-Salazar noted that the average remaining maturity of U.K. government debt is 13.4 years, and for France it is 8.2 years. This means the transmission of higher yields to overall fiscal cost will be gradual.

However, he also warned that France’s short-term maturing debt accounts for 15.9% of its GDP, which could create near-term liquidity pressure for French finances if market financing conditions deteriorate.

Addressing external concerns about renewed turbulence in the French bond market potentially sparking another European debt crisis, Federico Barriga-Salazar offered a relatively cautious assessment. He emphasized that Europe has established multiple institutional safeguards, including the European Stability Mechanism (ESM), the Banking Union, and various support tools from the European Central Bank, all fundamentally designed to contain the spillover of risks into a systemic crisis.

Fitch Ratings’ Global Head of Sovereign and Supranational Research, Managing Director Ed Parker, clearly outlined the triggers for sovereign rating downgrades: whether high fiscal deficits can be narrowed, whether the ratio of interest payments to fiscal revenue continues to rise, and whether the ratio of government debt to GDP can stabilize.

He warned:

If these indicators continue to deteriorate and governments fail to present a credible medium-term fiscal adjustment plan, there could be downward pressure on sovereign ratings.

Fitch’s report shows that the median ten-year government bond yield among the world’s top ten advanced economies is 161 basis points higher than the average interest rate on outstanding debt, making it increasingly difficult to reduce or even stabilize debt levels.

Ed Parker pointed out that most government bonds have long maturities, meaning it takes time for higher yields to affect the average effective interest rate on outstanding debt, giving governments a window to adjust. But he also emphasized:

If the debt/GDP ratio rises quickly, and there is a lack of credible fiscal plans or the political capacity to implement policies, the risk to public debt sustainability increases.

Taking France as an example, Fitch estimates that to keep the debt burden stable, its primary fiscal deficit must drop from the expected 2.9% this year to 0.4% of GDP; if actual financing costs rise to current market yields, France would need to carry out additional fiscal adjustments equivalent to 3.1% of GDP.

Ed Parker stated that, for both the U.S. and France, “If public finances deteriorate further, this will become a sensitive trigger for rating downgrades.”