U.S. Treasury Secretary Janet Yellen is yellin’ a warning to those on Capitol Hill – raise the debt ceiling or the U.S. could face default. Our Global Rates & Money Flows editor Murray Gunn predicted such a scenario back in October:
As the U.S. Presidential election looms, evidence is mounting that bond investors are becoming increasingly nervous.
To the two certainties of death and taxes, it seems that we can add another – an ever-increasing U.S. Federal debt. No matter who wins in November it is widely accepted that debt will continue to rise. The nominal debt is expanding almost exponentially now, especially as interest payments alone are costing the government nearly $100 billion per month (!). As a percentage of Gross Domestic Product (GDP), having reached 132% in 2020 before falling to 115% in 2023, the Federal debt has been rising again, currently sitting at 120% of GDP. As a reference, the average debt-to-GDP ratio from the 1960s up until the Great Financial Crisis of 2008 was only 47%.
The chart below shows that the cost of insuring against a U.S. Treasury default has been rising over the last month. Currently hovering around 39-basis points, it is still below the 65-basis point peak reached in April 2023 during yet another fight over the debt limit. Over the next few weeks, expect increasing focus on the fragility of U.S. debt:
Global Rates & Money Flows editor Murray Gunn is a 30-year veteran of global bond and money markets. Get institutional-level coverage of worldwide interest rates, debt and money by following this link.
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