US Treasury Secretary Scott Bessent stated that a combination of economic growth and fiscal restraint can curb the federal deficit, but given the sheer scale of government liabilities, market strategists doubt whether this approach will actually work. Speaking on Monday evening, Bessent said the Trump administration, having inherited a massive pile of debt, is doing two things: restraining spending and driving economic growth. He also noted that after one-time tax refund payments of $180 billion, tariff revenues have returned to higher levels.

Speaking at an event hosted by the Pennsylvania Chamber of Commerce, Bessent said: "What matters is the debt-to-GDP ratio, and we are going to start bending that curve and bringing it down. It could happen very quickly." He suggested that sustained GDP growth above 3% would help achieve this goal, and the previous quarter's economic growth was already on track to reach that level.

These remarks were merely a restatement of Bessent's long-held views. At least since June of last year, he has consistently said that economic growth and fiscal restraint can bring down the debt ratio. However, the latest comments come at a time when US Treasury yields are near multi-decade highs. The US Treasury Department is scheduled to release its quarterly refunding statement on November 4.

Strategists including Elias Haddad of Brown Brothers Harriman wrote in a report: "After the 10-year Treasury yield surged, Bessent is attempting to talk down long-end yields through verbal intervention."

Deficit Size Is Too Large

The 10-year Treasury yield approached 5.35% on Monday, the highest since 2002. On Tuesday, falling oil prices provided some support to the bond market, with the 10-year yield dropping to about 5.26% as of 11:30 am New York time. Economists estimate that the US fiscal deficit this year will be approximately 6% of GDP. From a historical perspective, a 6% deficit ratio is considered elevated during periods of low unemployment and steady economic growth. Although GDP growth approached 3% in 2023 and also reached that level at one point in 2024, the deficit ratio in both years exceeded 6%.

Marc Goldwein, senior policy director at the nonpartisan Committee for a Responsible Federal Budget, said: "Unless GDP growth is astonishingly fast, economic growth cannot substitute for genuine fiscal discipline." As many forecasters have pointed out, the US debt ratio is heading toward unprecedented levels. The Congressional Budget Office warned in February that the debt-to-GDP ratio will exceed the 106% record set in 1946 by 2030.

"Unrealistic"

Goldwein stated that to bring the fiscal deficit down to 3% of GDP, which is Bessent's target, the US economy would need to grow at 4.5%. "We cannot simply grow our way out of the deficit problem, not because it is mathematically impossible, but because it is unrealistic."

The surge in Treasury yields this year has further increased pressure on government borrowing. Investors are currently demanding yields above 5% on US Treasuries maturing in 5 to 30 years, while Treasury bills maturing within one year also carry yields above 4%. These yields are higher than the average yield of 3.48% on outstanding US Treasuries as of the end of August. This means that when older debt with lower yields matures and needs to be refinanced, the government's debt servicing costs will rise. In the first 11 months of fiscal year 2026, US net interest expenses have already reached $1 trillion.

Rodrigo Catril, a strategist at National Australia Bank, said that the rise in long-term Treasury yields partly reflects market concerns about "fiscal profligacy." "Sustaining faster economic growth certainly helps, but it does not solve the problem."

"Vision Is Not a Plan"

Catril and other market participants pointed out that fiscal policy is in the hands of Congress, which limits the impact Bessent's restraint commitments can have. "Reducing the budget deficit requires bipartisan consensus, and it is clearly very difficult for the two parties to bridge their differences at present."

Bessent said last month that Republicans might seek to push a fiscal consolidation plan through Congress quickly after the November 3 midterm elections, and that he is working with White House Budget Director Russ Vought to develop a package. However, Bessent has yet to announce a specific plan.

Gareth Berry, a strategist at Macquarie, said: "Expressing a vision is not the same as putting forward an actual plan."

The day after the midterm elections, the Treasury Department will release its latest debt issuance plan. This will be the first quarterly refunding statement since the Treasury unexpectedly adjusted its long-term Treasury buyback program. Investors and strategists say that given the higher cost of financing long-term bonds, the Treasury may signal reduced reliance on long-bond issuance going forward. In the previous quarterly refunding statement, the Treasury already made subtle wording adjustments, saying officials are evaluating possible "changes" in future coupon bond and floating-rate note issuance, rather than the previously stated "increases," leaving room for future reductions in issuance size.