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Richard Scrope
Fund Manager
How big can the balloon get before it bursts?
The US debt pile has been growing over time, but over the past 20 years this increase has gathered pace and currently stands at over $36 trillion, and this figure is expected to grow. With the US losing is last AAA rating, the market is now beginning to question whether the US Government debt really is a risk-free asset.
How big is too big?
With most of the moves that took past in the aftermath of ‘Liberation Day, generally now having unwound with credit spreads tightening and equity markets recovering much of their losses, investors may be forgiven for thinking that all is rosy in the markets; certainly, flows into US equity markets have gathered pace in the past few weeks.
However, the $36 trillion elephant in the room remains, and any weakness in the bond market is not conducive to strong equity returns and should President Trump’s ‘One Big Beautiful Bill Act’ pass through congress, an extra $5 trillion may be added to this number.
Does this matter now, when it hasn’t seemed to in the past?
Almost one-third of publicly held US debt is set to mature in the coming 12 months, and $7.85 trillion of the $9.2 trillion of debt that needs to be refinanced this year remains outstanding. Compounding this, the US is projected to run a federal deficit of almost $2 trillion, before the tax bill number is added to the mix, meaning that the treasury will need to issue almost $10 trillion this year at a time when the yield demanded by investors is rising.
At the end of 2024, the average interest rate on US debt had risen to 3.32%. However, with US 10-year yield running at 4.4% and the 30-year closer to 5%, the burden of refinancing this debt is set to increase, especially as all three major rating agencies now place US debt as AA, after Moody’s dropped its AAA rating last week. Thus, the US Government’s debt to GDP is likely to rise well above the current 123% and is likely to exceed the levels experienced during the pandemic.
Have bond yields peaked?
The news of the House passing the President’s tax bill, and sending to Congress to approve, saw the 30-year yields pop briefly above 5%, before finishing the day just below that threshold. However, as the chart below shows, the entire long end of the curve has shifted upwards in the past quarter, compounding the amount of federal spending that the US will use simply to service its debt, which currently stands at 16%, or 3% of GDP, a level last experienced during the 1991 recession.
Data source (unless otherwise stated): Bloomberg
Disclaimer
WARNING: All information about the VT Tyndall Global Select Fund(‘The Fund’) is available in The Fund’s prospectus and Key Investor Information Document which are available free of charge (in English) from Valu-Trac Investment Management Limited (www.valu-trac.com). Any investment in the fund should be made on the basis of the terms governing the fund and not