If rates were to rise and the average interest rate paid were to rise to 3%, rather than the average of 1.3% forecast under current conditions, the net interest payments as a share of GDP would rise to 3.2%. This is likely in the near term, but eventually rates will rise. Using September CBO forecasts, interest payments would appear to be manageable throughout the next decade, but the forecast also suggests rates would remain low. This is owed to the fact that interest rates are structurally lower, reducing the cost of debt. Despite the surge in government debt to combat the effects of the pandemic, the cost to service this debt is much cheaper than it was in, for example, the mid 90’s to early 00’s when debt to GDP was below 50% and the government operated with a budget surplus. The chart on the right shows the net interest payments on federal debt as a share of nominal GDP. The chart on the left shows national debt soaring (gray), but the interest rate paid on that debt coming down sharply in recent decades (light blue). The critical consideration to examine is not actually the level of debt or the ratio of debt to GDP, but rather the cost of servicing the debt. federal debt at 100.1% of GDP, the highest since World War II and rising, investors often wonder what the breaking point could be of mounting U.S. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.With U.S. Jim Leaviss is the chief investment officer for public fixed income at M&G Investments. You can listen to his podcast, Uncle Jim’s World of Bonds, on Spotify and AppleĪny opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In the meantime, watch out as the US’s reputation for fiscal and political competence takes a hit – global markets and economies won’t like that. This seems like a failure of the methodology. The AA+ credit rating only tells you that S&P expects you’ll get $100 paid to you, not that you’ll be able to buy the same amount of goods with it as you used to. Your bond would only buy you half as many Big Macs come 2029. But because investors get their $100 back when the bond matures, rating agencies are happy. A government could inflate away its liabilities (10% inflation halves the ‘real’ debt burden over seven years). That, for me, is a problem with the credit rating agencies – when looking at the US, the real risk for investors is normally around inflation. Why would a sovereign nation with the ability to print its own currency, ever need to restructure its debt? However, there is little likelihood that investors (including China and Japan, which each hold more than $1tn of Treasuries) will take a haircut on this debt. Expect a missed coupon payment to cause chaos in global financial markets. Their yields set the risk-free rate for the global economy – and from that, we value equities, real estate and everything else. US Treasury bonds are the foundation assets of the global economy – all other sovereign bonds are compared with them. Well, yes, and especially if the US does default on an interest payment, even if that default is more technical rather than a formal debt restructuring resulting in losses for investors. So, should we expect to see further US credit rating cuts? S&P also then worried greatly that the absence of bipartisan consensus on fiscal policy put America’s credit rating on a weak footing – fears that must surely be higher now. Today it has become a political tool used to try to ruin Joe Biden’s fiscal stimulus plans and make him look weak.
The debt ceiling was originally intended to prevent a president from increasing spending to fight foreign wars. But this isn’t entirely new President Obama faced a similar crisis in 2011 when the Republican Party also refused to increase the debt ceiling. We know how we got here – the polarisation of American politics and the toxicity of the Trump years has led to some 70% of Republicans not accepting Biden’s presidency as legitimate.
US Treasury Secretary Janet Yellen says a default would trigger a recession and a stock market plunge, while credit rating agency Moody’s says it would cause Americans to ‘pay for this default for generations’. The most powerful nation in the world, the US, stands on the brink of a self-inflicted debt default.Ī sticking plaster has been put in place until 3 December – thank goodness for that – but let’s not be shy about the consequences if the worst happens.