Investors have finally awakened to the size of the national debt and the speed with which it’s growing. Total debt is approaching $34 trillion, up from $22 trillion as recently as 2019. Given the rise in interest rates, the nation’s interest expense is also snowballing—to an annualized $981 billion in this year’s third quarter from $509 billion in the same quarter in 2020.
Despite concerns about the size of the debt, longer-term bonds are attractive. “Before, we weren’t getting compensated for interest-rate exposure,” he says. “That has changed.” Barney has been explaining this scenario lately to clients asking about projected deficits and growing federal debt. He makes a few additional points that he hopes will reassure them: “This isn’t a U.S. problem; it is affecting other developed countries,” he says of the high levels of government debt.
Can the market absorb higher amounts of U.S. government debt? So far, the answer is yes. Dynamics at some recent Treasury auctions have indicated weak demand, and market strategists are paying close attention to metrics like bid-to-cover ratios and the percentage of inventory that remains in the hands of bond dealers after an auction. But while foreign governments are purchasing fewer Treasuries, other buyers, such as pension funds, have stepped in.
When the fiscal health of the U.S. starts to become a worry globally, a major tell will be a decline in the U.S. dollar, which has risen against other currencies since the summer.