U.S. Treasury Bond Markets and America’s Growing Debt
Investors likely see the headlines frequently—the U.S. government cannot seem to run a budget surplus, and as a result, the national debt keeps getting bigger with every year that passes. As seen on the chart below, deficits—and therefore growing debt—have crossed political lines and have been an issue for over 20 years.1
Source: Federal Reserve Bank of St. Louis2
Investors are justifiably concerned that mounting debt could negatively impact the economy and markets. In an era of relatively high interest rates, rising deficits could also result in the government spending an increasing percentage of total tax revenue on interest payments each year—which means having less money to spend on everything else. A “crowding out” of government spending could detract from GDP growth.
To address some of these concerns around debt and provide a clearer picture of the current financial landscape, I present our latest July Stock Market Outlook Report. The goal of this report is to provide long-term investors with the data and insights needed to make informed and strategic decisions.
It also covers other relevant factors, such as:
Capital markets commentary: Is the S&P 500 too concentrated?
A bigger deficit also means the U.S. government needs to sell more Treasury bonds. As of June 30, U.S. Treasury market issuance has reached $14 trillion, which marks a +41.3% year-over-year increase. In 2023, there was over $21 trillion of issuance, a record. 2024 is well on its way to setting another one.
Source: Sifma4
Yet, despite expanding deficits and continued growth in Treasury market issuance, Treasury yields have come down from October 2023 lows. If the U.S.’s worsening fiscal situation was becoming a major concern for global markets, one might expect investors to demand higher yields on Treasurys as debt continued to rise. But the opposite has happened over the past 10 months.
The last time the U.S. ran a budget surplus in the late 1990s and early 2000s, the 10-year U.S. Treasury bond yield was slightly higher than it is today.
Source: Federal Reserve Bank of St. Louis5
The point here is not to say that mounting deficits and debt don’t matter—they do. But if it was becoming a serious problem with catastrophic consequences for the economy, we’d be seeing warning signs in Treasury yields. And so far, we have not.
A key reason why is because the size of deficits and the level of national debt are not the sole drivers of Treasury bond yields. Global demand for U.S. Treasury bonds plays a significant role as well, and long-duration Treasurys currently offer a solidly positive return for essentially no risk (assuming they’re held to maturity). Compared to other risk-free options in global markets, the U.S. looks very attractive, in my view.
Consider this fact: in 2023, approximately $190 trillion of U.S. Treasurys were bought and sold. For Germany, widely considered a solid developed economy with a reasonably healthy fiscal position, trading volume totaled about $7 trillion.
Not only does the U.S. Treasury offer better yields than many other developed countries, but they are also far more liquid and easier to trade. Investors know they can buy large amounts and/or sell large amounts of Treasurys—of essentially any maturity—at any time. These qualities, to date, have ensured strong ongoing demand, which keeps upward pressure on prices and downward pressure on Treasury bond yields. It also signals that rising deficits alone are not powerful enough to blunt U.S. economic growth.
Bottom Line for Investors
I want to reiterate my position—that mounting deficits and national debt should not be written off as nothingburgers. Rising deficits during a period of high interest rates can drive up interest costs as a percent of GDP, which can crowd out more productive government spending and serve as a significant drag on economic growth.
But it’s also my view that the U.S.’s current fiscal situation is not in a state that’s likely to be harmful to growth in the short to medium term. Interest rates in the late 1970s and early 1980s pushed interest costs as a percent of GDP to levels much higher than we’re seeing today, and the U.S. economy managed to work its way through it.
Federal Debt Interest Payments as a Percent of GDP
Source: Federal Reserve Bank of St. Louis6
This issue will be one to watch in the coming quarters and years. But for now, I think it can remain fairly low on investors’ watchlist of risks.
To navigate these uncertainties, it is vital to ground your investment strategies in solid data and factual analysis. To support you in this endeavor, I am offering our comprehensive July Stock Market Outlook Report7. This report is packed with detailed forecasts and expert insights, including:
Capital markets commentary: Is the S&P 500 too concentrated?
Key U.S. economic data
Global market data
Zacks S&P 500 earnings insights
Zacks sector picks
And more…
If you have $500,000 or more to invest, request our free Stock Market Outlook Report today!
1 Wall Street Journal. July 16, 2024. https://www.wsj.com/finance/how-wall-street-keeps-absorbing-americas-borrowing-binge-5e1262e7
2 Fred Economic Data. July 11, 2024. https://fred.stlouisfed.org/series/MTSDS133FMS#\
3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
5 Fred Economic Data. July 23, 2024. https://fred.stlouisfed.org/series/DGS10#
6 Fred Economic Data. April 25, 2024. https://fred.stlouisfed.org/series/A091RC1Q027SBEA#
7 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.
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