Government bonds for sale. Eventually, you run out of other people’s money!
The U.S. recorded its 23rd consecutive federal deficit in the year to September 2024 at US$1.83 trillion, around 6.5 per cent of gross domestic product (GDP). For October and November 2024, the federal budget deficit hit US$622 billion, up US$242 billion or 64 per cent year-on-year. Admittedly, some of the jump was related to timing differences.
And as U.S. Government indebtedness heads towards US$40 trillion over the foreseeable future, the annual interest expense on that debt is forecast to approach US$1.5 trillion, assuming a refinancing rate of 4.4 per cent, meaning it may become the number one expenditure item, possibly exceeding social security. The question is if the U.S. Government is spending around 5 per cent of GDP on interest expense, then surely that is indirectly stealing from other more constructive areas like boosting education, health, infrastructure and productivity.
U.S. Government debt/ GDP now usurps the previous peak at the close of World War II, and according to the International Monetary Fund, it currently exceeds 123 per cent. Given Government debt is growing at a much faster rate than GDP, the relativities are forecast to get much worse over the longer term.
And according to the Institute of International Finance (IIF) global debt now exceeds US$323 trillion, around 323 per cent of global GDP of US$100 trillion. Large government budget deficits (aggregating to US$100 trillion) over the next four years are expected to grow by at least 30 per cent or 6 per cent per annum.
At what point does the world recognise increasing repayment risks, and price in an appropriate premium on to the yield of long-term bonds? For example, since their record low in mid-2020 at 0.5 per cent, U.S. ten-year treasury bonds traded up to 5.0 per cent in October 2023 and have averaged 4.4 per cent over recent quarters. What happens if U.S. ten-year bonds, for example, trade up to an average, say, 6.0 per cent, still a relatively low level in the context of the 1980s and 1990s?
And watch out as governments come up with large new schemes to cover the effects of the energy crisis or move to direct investment dollars. Think of the Australian microcosm related to a $275 energy rebate on 11 million homes at a cost of AU$3 billion per annum, or spending AU$23 billion over ten years investing in a “Future Made in Australia” plan – just as Australian manufacturing hits a record low 5 per cent of GDP.
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 30 years of industry experience. David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
