U.S. government debt reached $38 trillion in September, of which $30 trillion is held by the public. Government debt now equals 124% of U.S. annual gross domestic product.
During a time when Washington is gripped by political dysfunction amid a government shutdown, growing global concerns around dollar-denominated securities are rising.
It is not surprising that confidence in the U.S. fiscal path as well as the relative safe-haven status of dollar-denominated securities is increasingly being questioned.
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The average interest rate on the government’s debt is 3.4%, which has been lowered by periods of near-zero interest rates. But those long-term rates have risen, to a range of 4% to 5%, which is higher compared to the rest of world except for the U.K.
The yield pickup, the guarantee of a dollar-denominated security, and the currency pickup of a strengthening dollar have all added to the attractiveness of U.S. securities for foreign investors.
In fact, foreign purchases of U.S. Treasury bills and bonds spiked to $4.3 trillion in April but slumped to $3.8 trillion in July. The lack of subsequent data makes it too early to call a peak, and there are other factors to consider.
For instance, Japan and France, both customers of dollar-denominated debt, are undergoing political turmoil of their own. Still, the yen and the euro have appreciated versus the dollar this year, causing foreign investors to hedge their U.S. investments and in the process erasing some of the yield pickup.
In the case of Japan, its too-low-for-too-long interest rates have long made U.S. securities that much more attractive. But even that regime of low rates has been changing, with the Bank of Japan moving to a positive policy rate in March last year and two rate hikes since then adding to a strengthening yen.
While interest-rate differentials and currency strength are determinative, each is subject to investor confidence in the government and the economies of both the numerator and the denominator in question.
The balance appears to be moving in favor of the U.S. trading partners.
