Source: Fortune.com
Summary
The International Monetary Fund (IMF) has warned that the increasing US debt is eroding the safety premium of US Treasury bonds, making it more expensive to borrow money. The US debt has reached $39 trillion, with annual budget deficits of $2 trillion, and interest costs of $1 trillion. The IMF report states that the increase in Treasury security supply is compressing the safety premium, pushing up borrowing costs globally. The spread between AAA-rated corporate bond yields and Treasury yields has also compressed.
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The numbers tell one story.
The US Treasury Department is issuing more debt, testing the appetites of bond investors. The result has been higher yields, with the Iran war and higher defense spending expected to worsen the debt outlook. The IMF report highlights that the convenience yield of Treasuries has turned negative, meaning they offer a higher yield than synthetic-dollar equivalents for hedged G10 sovereign bonds.
The erosion of US debt’s risk advantage can be seen in other areas of the bond market, with demand surging for debt issued by sovereign, supranational, and agencies (SSA) like the World Bank and the European Investment Bank.
The IMF urges Washington to stabilize its debt trajectory by taking action on both revenue and expenditures, including entitlement programs.
The US faces “inescapable” arithmetic, with debt already at 100% of GDP and expected to top 150% by 2055.
The window for orderly fiscal adjustment is narrowing, according to the IMF.
Author: Evan Null
