Investors have been fixated on the US bond market, known as Treasuries. Falling yields have led to huge increases in demand. This latest spike has brought about cries of the same disorder that broke out in the UK after former Prime Minister Liz Truss unveiled her mini-Budget back in September 2022. That action introduced tremendous turmoil to the government bond market. As the US government grapples with increasing debt interest repayments, the potential impact on public spending and the housing market raises alarms among financial analysts.
Investors, therefore, are closely watching the US Treasuries, which in the past have shown normally clear movements. Yet recent court decisions and postures from the Biden Administration show that things are changing. What happens when the risk for US government borrowing over 10 years rises suddenly from 3.9% to 4.5%. At the same time, the 30-year yield shot up close to 5%! Investors are jittery and increasingly doubt the sustainability of US government debt. This increased concern is shaping their perceptions of the overall economic situation.
Payments for US Treasuries occur over 10 to 30 predetermined years. With a bond, you won’t get your full repayment until the bond matures in 10 years. The new fiscal reality, characterized by higher yields, makes the government’s task of servicing its debt much more difficult. New debt interest repayments would make NPRT budgets less adequate. This financial strain might worsen public relief spending and increase costs for first-time home purchasers and other movers.
The circumstances are eerily similar to what transpired in the UK last year. The newly installed Liz Truss government responded by announcing £45 billion of unfunded tax cuts. This announcement prompted a panic reaction from investors, causing them to dump UK gilt-edged securities. In response, the Bank of England intervened, buying bonds to stabilize the market and insulate pension funds from default. Analysts are increasingly concerned that similar dynamics are beginning to take shape in the US.
In a recent note, Jonas Goltermann, the deputy chief markets economist at Capital Economics, flagged a deeply troubling trend. He warned that the kind of risk premium now apparent in US Treasury bonds and the dollar could be the same thing that doomed the UK last fall. Taking a step back, investors have reason to be concerned about the increasing volatility of US Treasuries. They worry that these securities are becoming more exposed to sudden dips in the market.
Since 2010, foreign ownership of US bonds has almost doubled, up by $3 trillion. Japan is the second largest holder of these securities. At the same time, China has recently retaken its status as the second biggest holder of US government debt in the world. This increasingly significant international investment is a testament to just how indispensable Treasuries are to the world’s financial system. Yet, it highlights emerging risks around foreign investor sentiment.
The US federal government’s skyrocketing debt interest payments point to a very dangerous fiscal trajectory. As these repayments increase, it will be more expensive to maintain the government’s financial obligations. Analysts are sounding the alarm that these inflationary pressures could lead to a broader domino effect throughout the economy. They are particularly hostile to any public spending program that requires stable long-term funding streams.
With continued interest rate increases, prospective homebuyers face increased mortgage rates. This upward pressure further complicates things for first-time and move-up buyers trying to find their place in the housing market. A 10% tariff on every country, across-the-board, is still in place. This is contributing to dangerous new complexity in economic conditions and trade relationships which is already weighing on both bond and housing markets.