The recent jump in Treasury yields has underscored how exposed the U.S. debt outlook is to the bond market, a vulnerability flagged by Scope Ratings in a new report.

On Friday, the Europe-based credit ratings agency affirmed the United States' sovereign score at AA-, three notches below the top rating and two steps below the AA+ grades assigned by rivals Moody's, Fitch and S&P Global Ratings, while keeping the outlook stable. A stable outlook signals that Scope does not anticipate a change to the rating over its horizon, even as the report lays out a deteriorating medium-term fiscal path.

Scope listed what still works in America's favor: a strong economy, the dollar's role as the world's reserve currency, robust institutions such as the Federal Reserve, and the deepest and most liquid capital markets.

Even so, the agency expects deficits to worsen, citing persistent "structural expenditure pressures" and limited political will for fiscal reform. Debt-servicing costs are set to drive further fiscal deterioration even as primary deficits—those excluding interest payments—hold steady at around 3.5% of GDP, according to Scope.

Market rates have already outrun official projections. The 10-year Treasury yield now stands at 5.27%, well past the long-term forecasts from the Congressional Budget Office, which saw yields at 4.3% from 2028 to 2031 and 4.4% from 2032 to 2036. That gap matters well beyond the federal budget: Treasury yields serve as the benchmark for borrowing costs across the financial system, influencing rates on everything from mortgages to corporate debt. The Committee for a Responsible Federal Budget (CRFB) has estimated that if yields stay roughly 1 percentage point above CBO's projections, about $3.5 trillion would be added to the debt over the next decade.

Scope warned that increasingly heavy interest costs limit the government's ability to respond to future shocks. Without stronger economic growth or substantial fiscal adjustment, it added, the general government debt burden will approach 160% of GDP by 2036.

"This trajectory points to an unsustainable medium-term fiscal path and leaves the sovereign increasingly exposed to shifts in market sentiment and financing conditions," Scope said.

How Washington manages its debt adds to the sensitivity. The U.S. has been rebalancing issuance toward short-term maturities and away from long-term bonds that carry higher rates. Treasury Secretary Scott Bessent continued the strategy, which began under the Biden administration, and doubled down with buybacks that call for issuing more short-term notes to retire longer-term debt. The trade-off is that as more debt comes due on quicker timelines, rolling it over becomes costlier whenever yields spike, as they have in recent months.

The investor base has shifted as well. Price-sensitive hedge funds have become bigger players in the $32 trillion Treasury market, replacing foreign central banks that were more stable holders of U.S. debt and adding to market volatility.

The U.S. debt limit further complicates the picture. Scope expects the current ceiling of $41.1 trillion to be reached by early 2027. The Treasury Department can use "extraordinary measures"—temporary accounting maneuvers that unlock borrowing room under the ceiling without new legislation—to prevent a default for several months, but lawmakers must act at some point.

"While Scope's baseline assumes that policymakers will ultimately agree to raise or suspend the debt limit, the post-midterm political landscape could increase the scope for prolonged partisan standoffs," the agency said. "Repeated debt-ceiling episodes continue to highlight weaknesses in fiscal governance and contribute to periodic market volatility."

The report coincided with the close of the federal government's fiscal year on Wednesday and the start of fiscal 2027 on Thursday. According to a year-end tally by CRFB, fiscal 2026 ended with a budget deficit of $2 trillion (6.2% of GDP), publicly held debt of $32.3 trillion (100% of GDP), and debt-interest costs of $1.1 trillion—a record high 3.4% of GDP and the second-largest line item in the budget, topping defense and Medicare.

"Based on evidence from the past year, we now expect much higher interest payments and lower tariff revenue going forward, which could send deficits and debt surging well beyond [CBO's] projections," CRFB said in a statement.

This story was originally featured on Fortune.com.