US Debt Crisis Sparks Concern on Wall Street with Treasury-Bond Rout
August 2023 — The ballooning debt burden of the United States has become a cause for worry on Wall Street as it is one of the 21 countries with a debt-to-GDP ratio exceeding 100%. The deteriorating public finances have led to a meltdown in Treasury-bond prices in recent weeks. Leading investors now speculate that the “bond vigilantes,” who dump fixed-income assets to oppose what they deem as imprudent policymaking, may have contributed to the Treasury-bond rout and the subsequent surge in benchmark yields. Here are four charts highlighting the concerns surrounding the massive US debt burden and its impact on the markets.
The Ever-Growing US Debt Mountain
Since the end of World War II, the US government has been increasingly borrowing to finance its spending programs. Historical Treasury Department data reveals that the national debt has ballooned from under $300 billion in June 1946 to a staggering $33 trillion by September 2023. This means that the US’s liabilities now exceed the combined size of the Chinese, Japanese, German, Indian, and British economies. Factors such as tax cuts during the Reagan-Bush era, the expansion of the Treasury-bond market, and major events like the invasion of Iraq and the 2008 financial crisis have all contributed to this massive increase in debt.
US Debt-to-GDP Ratio Exceeds 100%
It is not just the overall amount of debt that has risen over the past few decades. The deficit level relative to the US economy, as measured by the debt-to-GDP ratio, has steadily increased since 2000 and passed the 100% threshold in 2019, according to data from the International Monetary Fund. This signifies that the budget deficit could potentially hamper overall growth. Economists warn that the US debt dynamics are evolving in a way that demands attention. Taking on more debt may necessitate tax increases, trigger further bond sell-offs, and lead to higher interest rates. Only 21 countries worldwide, including Greece, Sri Lanka, and war-torn Sudan, have a deficit larger than their GDP. Among the G7 economies, Italy and Japan are the only two with higher debt-to-GDP ratios than the US.
The Role of Bond Vigilantes in the Treasury Market Meltdown
A debate continues regarding the significance of the US’s growing debt. While some believe that the government can continue accumulating debt without consequences due to the country’s status as the world’s largest economy and the dollar’s position as the global reserve currency, recent events suggest otherwise. The price of Treasurys has plummeted, leading to one of the most significant market routs in history and pushing yields on 10-year notes and 30-year bonds above 5% for the first time since 2007. This sell-off has been driven by investors’ fear that the Federal Reserve will maintain high borrowing costs to combat inflation. However, some on Wall Street speculate that bond vigilantes, activist traders who seek to tank Treasury prices to motivate Congress to reform its borrowing habits, are also behind the market meltdown. Prominent financial figures, including veteran analyst Ed Yardeni and PIMCO co-founder Bill Gross, support this hypothesis.
As the US deficit is expected to continue rising by trillions of dollars each year, it is clear that Wall Street will remain concerned for the foreseeable future.
