U.S. interest rates continue to squeeze the economy. And the dual problem is that U.S. interest rates have risen lately while fears of “higher for longer” persist. The economic squeeze is not just suppressing GDP growth. This higher interest rate climate is continuing to make the cost of anything financed even that much more expensive.
Perhaps the biggest underlying issue that is rarely discussed in the U.S. debt market is the massive premium that the United States is paying versus other developed nations. The U.S. pays more than a full percentage point over most European nations and Canada, and it pays an even higher premium than China and Japan.
Oggonomics has compiled U.S. Treasury yields in 2-year and 10-year Treasury notes and compared them against each major developed nation. This premium was before Thursday’s oil price spike of 6% to over $90 per barrel. Underlying real GDP growth was 2.1% in Q1-2026 and estimates for Q2-2026 were flat at 2.1% (WSJ). While this is still growth, think about interest rates having an impact on total prices over time for cars, houses, consumer goods and durable goods that are financed based on intermediate interest rates in the 2-year to 10-year Treasury yield range.
The theater of lower international interest rates allows those foreign governments to borrow capital at much lower rates, also making their annual debt servicing that much cheaper. It also makes it cheaper for consumers in those other markets to finance any purchases that are not paid in cash. Are they not also tied to inflation risks and energy prices? Are they not also seeing their deficits growing? Are they not also drowning in debt with no resolution in sight?
One reason is that the European Central Bank (ECB) cut rates aggressively after inflation peaked and the U.S. maintained a significant rate premium despite its fed funds rate cuts.
The data was captured on Wednesday, July 22, 2026 for comparisons, and the premium looks even steeper on Thursday after oil’s surge and inflation expectations keep pressuring U.S. interest rates.
U.S. Treasury Yields were 4.26% for 2-Year Notes 4.59% for 10-year notes at the time of reference.
| Nation | 2YR | Spread | 10YR | Spread |
|---|---|---|---|---|
| Belgium | 2.83 % | -143 | 3.69% | -90 |
| Canada | 2.82% | -143 | 3.56% | -103 |
| China | 1.25% | -301 | 1.74% | -285 |
| Denmark | 2.57% | -169 | 2.99% | -161 |
| France | 2.97% | -129 | 3.95% | -66 |
| Germany | 2.81% | -145 | 3.17% | -142 |
| Italy | 3.00% | -126 | 3.97% | -63 |
| Japan | 1.44% | -282 | 2.71% | -188 |
| Korea (South) | 3.72 | -54 | 4.32% | -27 |
| Netherlands | 2.78% | -148 | 3.24% | -135 |
| Spain | 2.85% | -141 | 3.61% | -99 |
| Sweden | 2.37% | -188 | 2.91% | -168 |
| Australia | 4.56% | +29 | 4.97% | +37 |
| U.K. | 4.41% | +15 | 5.04% | +45 |
Kevin Warsh took office as chairman of the Board of Governors of the Federal Reserve and chairman of the Federal Open Market Committee (FOMC) in May-2026. It had been expected in prior months that he would lower interest rates. After all, President Trump had lambasted prior Chair Jerome Powell endlessly for keeping interest rates too high for too long.
Warsh’s taking office coincided with the U.S.-Iran conflict having already driven up the price of oil because the world still runs on fossil fuels. This drove inflation higher, putting Warsh and any hopes of lower interest rates in a bind.
It would be ill-advised to believe that Warsh will attempt to lower interest rates any time soon. Inflation is still running above the Fed’s 2.5% target. Some economists and some of the regional Fed presidents have even signaled that interest rates may have to be hiked rather than lowered. And Warsh has been more hawkish than dovish in his interest rate commentary.
One issue that persists is that some foreign nations want to continue in de-dollarization. This means they will either continue selling or will buy less U.S. Treasuries ahead. Fewer buyers automatically assume that the U.S. interest rates will have to remain higher to attract buyers.
The long and short of the matter, without going into a deep dive on what the nearly $40 trillion U.S. deficit (122% of GDP), the premium the U.S. pays versus most developed nations remains stuck in a conundrum for U.S. investors. The European Central Bank cut its official deposit rate by more than 200 basis points in eight rate cuts from 2024 (at 4.5% for deposits) to 2026 (to a low of 2.15%), with its first rate hike (10 basis points to 2.25%) seen in June-2026.
The ECB’s cuts were driven by slowing inflation, improving growth and to avoid being stuck in a high rate environment. After all, higher rates make everything financed just that much more expensive.
Under Jerome Powell’s final term as Fed-Head, the U.S. Federal Reserve lowered rates much less aggressively despite inflation rates coming down since peaking in 2022-23. Powell cut rates three times in 2024 and three times in 2025, but should have lowered rates even further when he had the cover to do so. The effective Fed Funds range was cut from the 5.25%-5.50% peak down to 3.50%-3.75%, where it sits today. Powell moved from a laser focus on being data dependent to always citing unknown impacts from tariffs.
The U.S. rate cuts of 2024-25 were perhaps late and obviously did not go deep enough considering how aggressively rates were hiked from 2022-23. The Fed’s shift toward a more accommodative stance to support economic growth and its full employment mandates could have gone down even further. Now the rate-premium conundrum that persists today are coinciding with difficulties for Warsh to deliver on hopes of rate cuts for the immediate future.
Yes, a lot was skipped over here (Iran, oil, relative GDP and inflation, relative debt-to-GDP) to avoid a reporting from turning into a dissertation. But, in the end, the premium of U.S. rates versus our international peers and competitors remains too high. And, sadly, this interest rate premium conundrum is likely to remain in place for the foreseeable future. And those ballooning deficit numbers may prevent low-rate or zero-interest-rate policies from ever being seen again in normal times outside of even more widespread international crisis or economic crisis.
