Some bond investors are spooked by the growing burden of US debt as the election approaches

As the federal budget deficits continue to persist into the foreseeable future irrespective of the outcome of the presidential election, bond investors are growing increasingly concerned. While both President Joe Biden and former President Donald Trump have highlighted deficit reduction efforts during their administrations, the nonpartisan Congressional Budget Office (CBO) predicts that the deficit will increase from $1.6 trillion in 2024 to $2.6 trillion a decade from now. This has led to heightened worries among analysts and investors about the potential impact on bond yields and the stability of the Treasury market, given the need for substantial debt issuance to finance deficit spending.

Despite these concerns, experts believe that a debt crisis is not imminent, with JPMorgan analysts referring to the U.S. national debt as a “silent crisis” that is more of a problem for the future rather than the present. The robustness of the U.S. dollar as the leading reserve currency and the size of the Treasury bond market make a sudden drop in demand for U.S. government bonds unlikely. However, shifts in demand for U.S. bonds have been observed, with foreign ownership not keeping pace with market growth and the Federal Reserve reducing its bond holdings, prompting investors to reassess the bond market.

David Rogal, managing director at BlackRock’s global fixed income group, emphasized the importance of considering both supply and demand dynamics, especially in a scenario where the buyer base is shrinking and supply is increasing. Craig Ellinger of UBS Asset Management suggests that short-term debt may be a safer option for investors in case deficits spiral out of control. With federal spending on interest payments exceeding military and Medicare expenditures due to the high interest rate environment, concerns about the sustainability of lower rates given the escalating U.S. debt levels have heightened.

As the federal government’s gross national debt surpasses $34.5 trillion and the debt held by the public climbs to $21 trillion, projections indicate that it could reach $48 trillion by 2034. Economists analyzing the national debt prefer the debt held by the public as a key metric. Against this backdrop, Ella Hoxha, head of fixed income at Newton Investment Management, advocates for short-term maturities, given the prevailing market conditions. Yields on the 10-year Treasury bond stand at around 4.4%, but Hoxha warns that they could escalate to 8% or even 10% in the coming years, given the unsustainable nature of lower rates in the face of soaring U.S. debt levels.

Ultimately, the combination of persistent federal budget deficits, rising national debt levels, and interest costs outstripping defense and Medicare spending has prompted bond investors to reconsider their strategies in anticipation of potential challenges ahead. While a debt crisis is not immediate, the long-term implications of escalating deficits and debt levels are a growing cause for concern among investors and analysts alike. Vigilance and prudent risk management will be crucial in navigating the evolving landscape of the Treasury bond market amid uncertain economic conditions and fiscal policies.