US government’s growing debt worrying financial markets
NEW YORK
Since the return of Donald Trump to the White House uncertainty about U.S. financial policy has caused concern as U.S. debt continues to rise.
Those concerns have been visible on financial markets as U.S. bond yields have climbed, an indication that investors are worried about the sustainability of the debt of the world's top economy.
Those concerns have also affected the dollar, which as the global reserve currency has usually been seen as a safe haven currency. Foreigners have to purchase dollars if they want to buy U.S. bonds, which have also been seen as one of the safest assets in times of volatility.
The U.S. dollar lost more than 10 percent during the first half of the year, its worst performance since 1973.
The U.S. Treasury raises funds by issuing three types of debt instruments: Short-term bills, medium-term notes and long-term bonds.
They carry a face value but are sold at a discount, with that price helping determine the yield, or rate of return for investors.
Higher yields indicate investors are demanding a higher rate of return to hold U.S. debt, which can be an indication about concern over whether they will eventually be repaid.
The yields on 30-year U.S. bonds rose above the symbolic level of 5 percent in May, but have since retreated to around 4.8 percent.
When Moody's cut the United States's top triple-A credit rating in May it cited rising levels of government debt and the impact of the interest costs on the U.S. budget.
U.S. debt now totals more than $36.2 trillion, or 120 percent of annual economic output.
Around $29 trillion of that is bonds that the Treasury sells on markets to investors: Principally banks, pension funds and foreign governments.
Foreign governments currently own $9 trillion in U.S. debt, with Japan, Britain and China the top holders.
China had until March been either the top or the second-largest holder of U.S. government debt.
Since the US-China trade war in 2020 during Trump's first term in office, "China has gotten rid of U.S. debt in favour of gold. It didn't sell its bonds but it didn't replace those that matured," said Aurelien Buffault, an asset manager at Delubac AM.
The size of the U.S. debt market also makes it attractive to investors.
"It is about 20 percent larger than the European sovereign debt market in terms of capitalisation," said Guy Stear, head of developed markets research at Amundi.
However, since April investors have started to pass over U.S. debt and the dollar when seeking safe haven assets, noted Stear.
In the current environment, "investors are looking for alternative safe havens, that is, a currency and assets that protect them when volatility and increased uncertainty," said Imene Rahmouni-Rousseau, director general of market operations at the European Central Bank.
"It is precisely the euro and European government bonds that have played this role of protective shield" and "for the first time since the 2011 financial crisis European financial markers are considered very attractive by investors" globally, she opined.
