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The cost of US debt is close to a trillion a year in interest and the bond points to 2007

Date: July 12, 2024 Time: 23:23:02

Fitch’s rating downgrade of the US public debt has raised anger among some investors and the official sector of economists and advisers linked to Washington. Criticism of the credit risk appraiser’s decision due to the timing and the arguments made have alerted the markets, which have reassessed the risk of the largest economy in the world. The Secretary of the Treasury, Janet Yellen, has described as “arbitrary” and “based on obsolete data” an action that will make the indebtedness of the Joe Biden government more expensive.

In fact, it is already doing so in the secondary market. The yield on the 10-year federal bond has climbed to its annual maximum, close to 4.2%, is about to exceed the maximum of November 2022 and therefore looks again at levels not seen since 2007. The 10-year interest contrasts with the prices of the rest of the installments. The curve is still inverted discounting a probable entry into recession at the end of the year, as Fitch warned in his report upon withdrawing triple A

The 2-year bond offers a return of 4.9%, the 3-year 4.6% and in the shorter maturities it is higher. The ‘treauries bills’, or letters, at 3 months (5.4%), 6 months (5.5%) and 12 months (5.4%) are aligned with the last rise in interest rates to 5.25% -5.5% made by the Reserve Federal (Fed) last week. Fitch also believes that the monetary tightening cycle weakens the US credit profile and therefore it can no longer maintain the highest credit rating.

Interest payment doubles in 18 months

For technicians, the debt to GDP ratio marks the solvency in the repayment capacity of the issuer. In the case of the US, after marking a maximum of 134% three years ago, it has dropped to 118% according to data up to March. However, the growth of the economy since then hides a larger debt. Specifically, this has gone from 26.5 to 31.5 trillion dollars. This increase of 5 trillion new financing in just 36 months is another of the red flags that Fitch associates with the rating downgrade, according to his report.

The agency sees a problem in the increase in the interest charge associated with the continuous increase in US public debt. According to Bloomberg data, the average rate paid by the Treasury for all its issues has already exceeded 3%, its highest level since 2009. With each auction, that average cost continues to rise. The problem is that the volume of US state debt is now triple what it was 14 years ago. With this breeding ground, the Fed’s rate hike cycle has skyrocketed the cost of debt service to almost double it since 2020. The Treasury pays $970 billion annually in interest on its debt, 50% more than it did a year, according to estimates up to April by the Fed itself. The figure will exceed a trillion dollars before the end of 2023.

Tension with the Treasury auction

The increase in the profitability of the debt and the reference cost for the issuer goes hand in hand with falls in the prices of the bonds, whose price moves inversely. Investors have taken note of a change of planes by the US Treasury, which has increased the size of the quarterly long-term debt auction (3, 10 and 30 years) scheduled for next week. The department directed by Yellen expects to raise 103,000 million dollars, more than expected and the first increase in the objective of the operation since the beginning of 2021. The figure means issuing 19,000 million dollars in new debt.

The need for additional money has lit the fuse for bond sales due to the breach of commitments to reduce spending by the federal government after the agreement to raise the US public debt ceiling of 31.4 trillion dollars that was in force until June. The new limit is not marked but suspended until January 2025, after the presidential elections. In the previous suspension of the debt ceiling, with Trump in government, the public debt grew by more than 3 trillion dollars coinciding with the Covid pandemic.

In its report, Fitch points to several factors that triggered its decision, including the recession, the tightening of rates and one that stands out: the loss of confidence in Washington’s fiscal management: “The rating downgrade of the United States reflects the fiscal deterioration over the next three years, a high and growing general government debt burden, and governance erosion relative to ‘AA’ and ‘AAA’ rated countries after repeated clashes over debt limits over the past two decades , with last-minute resolutions”.

The US Treasury, which knew about the decision in advance, was quick to react. “President Biden and I are committed to fiscal sustainability. The most recent debt limit legislation added more than $1 trillion in deficit reduction and improved our fiscal track record. Looking ahead, President Biden has introduced a “Budget that would reduce the deficit by $2.6 trillion over the next decade through a balanced approach that would support long-term investments,” Yellen defended Wednesday.

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Puck Henry
Puck Henry
Puck Henry is an editor for ePrimefeed covering all types of news.

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