What this chart shows
This chart shows the Congressional Budget Office’s (CBO) projections for total outstanding US debt and interest expenses as a percentage of GDP over the next 30 years. The chart shows the debt pile is projected to soar to $48 trillion and interest expenses rising from 2.4% to 3.9% of GDP by 2034. Debt has been on a steady incline since the early 2000s due to the US running a consistent deficit for 22 years. This trend stepped up a gear in the last decade, fuelled by excess spending during the pandemic, tax cuts under the Trump administration, and expansive programmes like the Inflation Reduction and CHIPS and Science Acts. Net interest payments, the amount required to service existing debt, are surging as a result of a higher interest rate environment relative to the previous two decades.
Why this is important
The mounting debt burden, alongside rising servicing costs (relative to GDP) becomes a major concern for an ageing population, particularly if crucial spending on areas such as Medicare and Social Security, are forced to be cut back. The amount spent on interest payments is already set to exceed total spending on national defence this year. Policymakers will hope that some of this pressure can be alleviated by a boost to productivity from AI causing an uptick in economic growth. However, the question is not only whether policymakers believe this trajectory is sustainable, but more importantly whether bond markets consider it sustainable. Recent history has shown the consequences when markets lose faith in the government’s ability to demonstrate fiscal responsibility, epitomised by the fleeting tenure of UK Prime Minister, Liz Truss. In this instance, the intention to implement unfunded tax cuts precipitated a sharp sell off in bonds causing a crisis for exposed pension funds and a significant currency devaluation. In a US based scenario, the repercussions would reverberate worldwide, given the US’s pivotal role as a benchmark for global interest rates. Ultimately, this is a problem that policymakers will eventually need to address, although it does not currently appear high up on the agenda. A Trump presidency has already pledged a renewal in tax cuts and a potentially damaging immigration crackdown, while Biden shows no interest in reining in previous spending programmes which garner voter support. In a speech last year Fed Chair Jerome Powell warned against complacency, stating, “The path we’re on is unsustainable, and we’ll have to get off that path sooner rather than later”. Policymakers should heed this warning and consider making tough decisions, or risk bond markets making the decision for them.
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Source: Momentum Global Investment Management, Bloomberg Finance L.P. Data to 19 September 2023.
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This chart shows the difference in 30-day volatility between the iShares 20+ Year Treasury Bond ETF (Exchange Traded Fund) and the SPDR S&P 500 Trust ETF. ETFs are funds traded on stock exchanges and typically hold a range of holdings in a specific asset class with the aim of tracking their overall price movements.
Source: Momentum Global Investment Management, Bloomberg L.P. Data to 17 October 2023.