The federal government has been running on a hamster wheel of debt by refinancing trillions of dollars every month with trillions more in fresh borrowing that comes due in a few months.

To keep interest costs on $39 trillion in debt from exploding further, the Treasury Department has relied heavily on short-term securities that have lower yields than longer-term bonds.

In fact, about 85% of debt issuance over the past few years has been Treasury bills that mature in a year or sooner, according to Capital Economics. As a result, 20% of outstanding federal debt will come due in the next four months—and that share with hit 33% within a year.

“Therefore, the biggest risk to the debt burden would be a sharp rise in short-dated yields if the Fed were to hike rates by more than expected in the coming year,” Ariane Curtis, senior North America economist at Capital Economics, wrote in a note late last month.

Since then, the Federal Reserve has sounded even more hawkish on rates. New Fed Chair Kevin Warsh has taken a hard line on inflation recently, and other policymakers have signaled they can no longer tolerate the current inflation rate, which has exceeded the central bank’s 2% target for five years.

Dallas Fed President Lorie Logan said on Thursday that “inflation has been too high, for too long, and does not appear to be on track all the way back to 2%,” noting that inflation risks are to the upside.

On Friday, Cleveland Fed President Beth Hammack pointed out that inflation is too high and that the labor market is “right around my level of maximum employment,” indicating more concern for prices versus jobs.

“For the first time in my tenure, I’m hearing from businesses who say they think we need to take action to curb inflation, and from consumers who can’t make ends meet about a growing sense of despair,” she wrote in a social media post.

Her warning came despite the latest consumer price index coming in below expectations, easing fears that the Fed might have to hike rates later this month.

Still, the overall trend has been a more hawkish Fed as the economy has remained resilient, with half of policymakers predicting rate hikes soon. That prompted analysts at Bank of America to change their Fed forecast to three quarter-point increases this year, up from a previous base case for rates to remain steady through 2026.

On top of that, the collapse of the U.S.-Iran ceasefire in the past week has sent oil prices surging again, and the national average for a gallon of gasoline is back above $4.

Higher energy prices will add to cost pressure from the AI boom, which has made everything from utility bills to consumer electronics and construction more expensive.

The Treasury Department has enormous borrow needs with a projected annual budget deficit of $2 trillion, while also facing more bond-market competition that has already forced yields higher to draw enough demand.

Hyperscalers are issuing a flood of debt to finance hundreds of billions of dollars in AI spending. And even the historically tight-fisted German government is ending decades of fiscal restraint with plans to borrow 800 billion euros by 2030 to beef up its military.

Investor demand is waning too. Hoisington Investment Management, a bond manager that had been bullish on Treasuries for more than 30 years, finally reversed its stance, citing views for higher inflation and yields.

Its quarterly report said soaring U.S. debt has caused investors to “increasingly demand a higher risk premium on Treasury securities.”

For now, Capital Economics doesn’t think a recent uptick in Treasury yields on its own will shake market confidence in the federal government’s ability to service its debt, despite interest costs already at $1 trillion a year.

“But the longer that yields stay high, and the more debt is refinanced or issued at those levels, the more unsustainable the debt path will become,” Curtis warned. “And with bond markets becoming more sensitive to high debt and fiscal credibility concerns in advanced economies more broadly, fiscal risks remain significant.”