Last week's off-the-charts CPI data in the United States triggered a market sell-off of U.S. Treasury bonds. After the U.S. Department of the Treasury's auction of 10-year Treasury notes met with a cold response, investors further intensified their selling of U.S. debt, pushing the 10-year U.S. Treasury bond yields to a high of 4.5%.
If the Federal Reserve continues not to lower interest rates, the environment for the U.S. government to finance its debt will further deteriorate.
Debt interest may become the largest financial burden for the U.S. government.
The first impression that last week's U.S. CPI data brought to investors is that inflation has not been fully curbed, and the Federal Reserve may maintain high interest rates for months or even years to come.
James Aubin, Chief Investment Officer at Sierra Mutual Funds, said, "The U.S. March CPI data, which exceeded expectations, changed investors' views on the direction of Federal Reserve policy, and the market's narrative logic has changed."
High interest rates mean that the interest cost of borrowing new debt for the U.S. federal government remains high.
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The U.S. Congressional Budget Office (CBO) said that in fiscal year 2023, U.S. Treasury interest payments will be as high as $659 billion. The trend of rising U.S. debt interest may continue, and it is expected that over the next decade, the total interest payments on U.S. government debt will reach a record $12.4 trillion.
Bank of America analyst Michael Hartnett even predicted that U.S. debt interest will reach $1.6 trillion by the end of 2024, surpassing social security spending to become the largest single government expenditure.
According to Torsten Slok, Chief Economist at Apollo Global Management, in 2024 alone, a record $8.9 trillion in Treasury bonds (about one-third of the U.S.'s outstanding debt) will mature.In a high-interest-rate environment, the U.S. government faces immense pressure to repay its debts.
The supply of U.S. Treasury bonds is increasing, and they are becoming harder to sell!
The rising debt and interest, combined with ongoing fiscal deficits, force the U.S. government to continuously issue bonds to borrow money to fill the gaps. The Federal Reserve's delay in lowering interest rates will exacerbate the U.S. government's debt problems.
Bill Merz, head of research at Bank of America Capital Markets, said:
"Due to the U.S. federal government's deficits year after year, it can only be made up by issuing debt. The current high interest rate levels lead to increased interest costs, forcing the U.S. government to continuously increase the issuance of Treasury bonds to finance."
Since 2020, the U.S. has been unrestrained in its path of issuing debt, with a minimum of 4 trillion U.S. dollars issued each quarter to calm the nerves.
In the first quarter of this year, the U.S. issued 7.2 trillion U.S. dollars in Treasury bonds, setting the highest quarterly debt issuance record in history, even more than what was issued to cope with the impact of the COVID-19 pandemic.
As the issuance of U.S. debt accelerates, there are even signs of oversupply, and investors are almost unable to buy.
This is also one of the reasons why recent U.S. Treasury bond auctions have been met with a cold response.
The Federal Reserve, Japan, and Europe are the basic buyers of U.S. debt.Although recent U.S. Treasury auctions have been met with a lukewarm response, with some investors choosing to sit on the sidelines, the fundamental base for purchasing U.S. Treasuries remains solid, such as the Federal Reserve, as well as investors from Japan and Europe.
Out of the United States' $34 trillion debt, approximately 22% is government debt, with the remaining 78% being public debt. Within this public debt, American creditors account for about 70%, while international creditors make up around 30%.
Among American creditors, the Federal Reserve is the largest player, followed by mutual funds, pension funds, banks, and insurance companies. The Federal Reserve's traditional modus operandi is to use quantitative easing (QE) and quantitative tightening (QT) to control debt purchase programs, thereby adjusting the balance sheet to achieve the goal of controlling market liquidity.
Due to the recent signals of slowing down balance sheet reduction in the minutes of the Federal Reserve's March meeting, the Federal Open Market Committee (FOMC) members generally agreed to halve the monthly reduction in the balance sheet. This is a minor positive for supporting U.S. Treasury prices.
International investors from Japan and Europe prefer to buy U.S. Treasuries for several reasons. On one hand, Japan and several Eurozone countries have long had a trade surplus with the United States, and the surplus dollars in their current accounts have nowhere to go but to return to the U.S. to purchase Treasuries, which not only maintains international relations but also earns some interest.
On the other hand, the long-standing zero-interest rate or even negative interest rate policies of the Bank of Japan and the European Central Bank make the yields on their domestic bonds far inferior to those of U.S. Treasury bonds. With their own bonds underperforming, they have no choice but to invest in the United States. Especially after the U.S. has gone through nearly two years of interest rate hikes, the yield on 10-year U.S. Treasuries has exceeded 4%, making U.S. Treasuries suddenly more attractive.
The U.S. Department of the Treasury is expected to announce its third-quarter debt issuance plan at the end of April, at which time we can see whether the U.S. appetite for debt issuance has grown again.
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