U.S. bond yields, record highs! Borrowing money now is "very cool", and I will see how you will pay it back in the future

The 1-year U.S. Treasury rate exceeded 5.5%, the 10-year Treasury rate continued to be above 4.5%, and the 20-year Treasury rate exceeded 4.8% – more than doubling the current cost pressure on the US federal government to borrow money compared to the low interest rate of about 2% a few years ago.

Interest expense will hollow out the fiscal capacity of the US federal government

From 2010 to 2021, U.S. bond interest rates were in a relative position, and the pressure on the U.S. federal government to borrow and consume was relatively low — the interest paid annually was around $500 billion, and in some years even below $500 billion.

$500 billion has exceeded the fiscal revenue capacity of the central government of most countries and belongs to the volcano level. But the U.S. economy is strong and taxes are huge, and the federal government can barely afford it. No matter how bad it is, you can also "borrow new debts to pay off old debts".

But now the situation has changed dramatically! The United States borrows more frequently and on a larger scale than in previous years. A few years ago, the average annual growth rate of the US national debt was just hundreds of billions of dollars, nearly trillion dollars, but now the average annual growth rate is often $2 trillion.

It also pushed the balance of US debt to achieve a breakthrough of $33.1 trillion in September this year, and the proportion of US debt to US GDP soared from about 60% in previous years to 130% at present. And we don't know exactly what heights the U.S. debt will reach.

Against the backdrop of record highs in U.S. bond balances, U.S. bond interest rates have also reached new highs. It is expected that we will soon see that the US federal government needs to spend $800 billion, $1 trillion, $1.2 trillion, or even $1.5 trillion a year on interest expenses.

Please note that this is just rational spending! If the current principal is added, the US federal government may need to spend "one-third of its annual fiscal revenue" on the principal and interest of the US bond, which is undoubtedly hollowing out the financial capacity of the US federal government.

May I ask the United States: the interest rate of US bonds, do you dare to make it higher?

Against the backdrop of a weakening world economy and a surge in safe-haven demand brought about by geopolitical volatility, the appetite of overseas investors in U.S. bonds has been re-enhanced. In August 2023, the balance of U.S. bonds held by overseas investors expanded to US$7,654.9 billion.

Compared with $7,290.1 billion at the beginning of the year, the balance of U.S. debt held by U.S. overseas investors increased by 5%, which seems to be in favor of U.S. bonds again - this favor, on the one hand, the safety of U.S. bonds has been proven by history; On the other hand, the return on holding U.S. bonds is higher.

Coupled with the enthusiasm of the Federal Reserve, the social security trust fund managed by the US government, commercial banks, other institutions and retail investors, the current US debt is not worried about selling.

But U.S. bonds are just bonds of the U.S. federal government. The high yield of U.S. bonds has also driven the cost of financing for local governments, companies and other institutions – interest rates on many U.S. bonds have now become very high and high, and they have become the target of international capital influx.

If bond rates remain high for a long time, it will significantly increase the increase in US external net debt. A sharp cut in bond rates would lead to the withdrawal of tens of trillions of foreign capital previously introduced – even if it is $1 trillion, could lead to a collapse of the dollar.

So, the United States is in a dilemma! Cliff Corso, president and chief investment officer at Advisors Asset Management, warned that the U.S. economy may not be stable with a long period of high interest rates. The future is "cloudy and uncertain", making risky assets "stormy".

But surprisingly, while many investors smell red flags and consider it "volcanic debt," they struggle to get out because short-term interest rates exceed 5.5%. Hey, everything is blindfolded by making money. This article is written by Nansheng, please do not reprint or plagiarize without authorization!