The sharp fall of US treasury bond bonds, which upset the US market this month, is forcing investors to focus on the rising government debt.
The accelerated growth of US debt has caused investors' concern in 2023. As President Biden and then Speaker of the House of Representatives Kevin McCarthy reached an agreement at the last minute to raise the federal debt ceiling, legislators barely avoided a catastrophic default in June.
Now, some prominent figures on Wall Street have raised the possibility that the so-called "bond vigilantes" may make a comeback, referring to the fixed income market being able to force governments and central banks to adopt tightening policies in certain circumstances. To some extent, this has also exacerbated the collapse of US treasury bond bonds, leading to the benchmark yield rising to a 16 year high.
The following four charts show why the huge debt burden in the United States is a concern and how it has affected the market.
The "debt mountain" in the United States is still growing
Since the end of World War II, the government has borrowed more and more money to support its expenditure plans.
According to the historical data of the Ministry of Finance, the US treasury bond has surged from less than US $300 billion in June 1946 to an astonishing US $33 trillion in September 2023- which means that the US debt is now more than the combined economy of China, Japan, Germany, India and the UK.
Economists said that the tax reduction policy during the Reagan Bush period, the substantial expansion of the US treasury bond bond market, the invasion of Iraq and the financial crisis in 2008 and other breakout points all led to a sharp rise in debt.
The increasing repayment obligations of the government have also sparked disagreements in Washington, with Florida Governor Ron DeSantis and well-known far-right Republicans such as Representative Matt Gaetz openly opposing previous compromises on the debt ceiling issue and opposing the Biden administration's student loan relief measures.
The ratio of US debt to GDP has crossed a critical threshold
In the past few decades, it has not only been the increase in total debt.
According to the International Monetary Fund (IMF) data, measured by the ratio of US debt to gross domestic product (GDP), the deficit level relative to the overall size of the US economy has also been rising steadily since 2000, and exceeded 100% for the first time in 2019.
Capital Group economist Darrell Spence said that this threshold signifies that a country may have to start worrying that its budget deficit will drag down overall economic growth.
"When the outstanding debt exceeds 100% of GDP, there may not be an immediate problem." He wrote in a research report last week: "Nevertheless, the debt situation in the United States is evolving and needs attention." He warned that taking on more debt may force the government to increase taxes, trigger further bond selling, and lead to higher interest rates.
According to data from the International Monetary Fund, the United States is one of the only 21 countries in the world with deficits exceeding the total GDP, just like Greece, Sri Lanka, and war-torn Sudan.
At the same time, over the past 20 years, the ratio of US debt to GDP has also risen faster than most of the Group of Seven (G7) economies. Italy and Japan are the only two countries in the group with higher government debt to GDP ratios.
The "bond volunteers" may be exacerbating the collapse of the US treasury bond bond market
There is still controversy in the market regarding this issue.
For some people, the US government can continue to accumulate debt as it pleases, knowing that the US, as the world's largest economy, and the position of the US dollar as the global reserve currency, will provide protection for it. But the events of the past few weeks indicate that investors' confidence in the United States being able to repay its debts may be weakening.
The price of US treasury bond bonds has experienced one of the most serious slumps in the history of the market, and the yield of 10-year and 30-year treasury bond has soared to more than 5% for the first time since 2007.
Investors are concerned that the Federal Reserve will maintain high borrowing costs for a long period until 2024 in order to curb inflation, which has driven a sell-off - as the low risk but fixed return of bonds becomes less attractive when interest rates rise.
However, some people on Wall Street believe that the market slump was also driven by the "bond volunteers", who tried to lower the price of treasury bond bonds to encourage Congress to reform its borrowing habits.
Senior analyst Ed Yardeni stated in September that "since the downgrade of the US government debt rating on August 1st, people have been paying attention to the deficit issue." He coined the term "bond vigilante" in the 1980s.
I think we will face real problems, and my friends, bond volunteers, may need to take action to persuade politicians that we must take more fundamental measures to reduce the long-term prospects of the deficit, "he added.
Legendary investor Bill Gross, known as the "Old Bond King," also supports this assumption, stating earlier this month that a group of retail traders may have controlled the market and pushed yields up to 5%. Gross earned billions of dollars by trading this asset class.