Our country is in the middle of an accelerating fiscal catastrophe as the debt of the United States continues to accumulate to a staggering $36.2 trillion. The public is directly owed $28.9 trillion of this total. This should give everyone serious pause about the sustainability and effectiveness of U.S. financial policies. The proposed budget deficit is approaching 7 percent of the gross domestic product (GDP). The warning bells are ringing expert alarmist regarding the country’s unsustainable fiscal trajectory. Just last week, Moody’s Ratings made a big move, downgrading the U.S. debt rating. In fact, they cited big annual fiscal deficits and increased interest costs as the justification for this move.
The economic conditions have changed exponentially. The yield on the 30-year bond has officially crossed above 5%, which is its highest level since October 2023. Likewise, the yield on the 10-year note moved near 4.6%, a point not reached since February. These recent developments point to a time where investors will require higher yields as a more pronounced risk premium for holding U.S. debt. Financial markets are already starting to anticipate the storm created by the trifecta of rising monetary rates, growing trade wars, and a pending fiscal disaster.
Rising Yields and Investor Concerns
That spike in yields is indicative of increasing investor fear about U.S. fiscal health. With the deficit projected to hit 6.5%-7% of GDP, analysts argue that such levels are “inconsistent with debt-to-GDP stability over the long run.” This path forward has really huge consequences. History suggests that rising interest rates will squeeze corporate profit margins and raise borrowing costs for both businesses and consumers.
Mitch Goldberg, president of ClientFirst Strategy, summed up the current state of play in a recent tweet.
“I feel like the dam is finally starting to break a little bit, and there’s too many holes in the dike to put our fingers in,” – Mitch Goldberg, president of ClientFirst Strategy.
This sentiment resonates with many financial experts who believe that absent a clearer commitment to reducing deficits, investor concerns are likely to persist.
Moody’s Downgrade and its Implications
In the past, Moody’s Ratings recent downgrade has sent shockwaves through financial markets. Although Kathy Jones, chief fixed income strategist at Charles Schwab, stated that “Moody’s didn’t tell us anything we didn’t already know,” she emphasized that the downgrade highlights the troubling direction of U.S. fiscal policies.
Now, investors are struggling with the market ramifications of this surprise and unprecedented downgrade. Many have since come to agree that those permanent 2017 tax cuts would significantly exacerbate already dire fiscal challenges. Protracted trade tensions with both Japan and China make an already fragile situation that much more precarious. These two countries are the largest and third-largest official foreign holders of Treasury debt, which makes the problem all the more difficult.
Ed Yardeni, president of Yardeni Research, recently warned about the fallout that could occur based on what Congress does or does not do about these looming fiscal calamities.
“If [the bill] fails, the financial markets won’t be happy. But if it passes — well, that might be just as problematic,” – Ed Yardeni, head of Yardeni Research.
A New Economic Regime
With concern over fiscal sustainability increasing on both sides of the aisle, analysts on the market are beginning to expect a new investor interaction preference to economic fundamentals. Goldberg cautioned that volatility in the stock market is likely to increase.
“We’re going to be facing 20% plus moves more frequently in the stock market,” – Mitch Goldberg, president of ClientFirst Strategy.
He went on to explain how all of this means so much more as a big sign of the times.
“It’s not just a new debt financing regime we’re facing. It’s a whole new global economy regime,” – Mitch Goldberg, president of ClientFirst Strategy.
This assessment reflects a growing consensus among economists that the United States is entering uncharted territory in its economic journey.
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