US $40-trillion debt: Why markets from New York to Tokyo are worried

In Wyoming’s Grand Teton National Park, policymakers and economists will convene for the Federal Reserve Bank of Kansas City's annual Jackson Hole Economic Policy Symposium, beginning Thursday. This year's gathering is particularly significant due to recent events and the first speech of US Federal Reserve Chairman Kevin Warsh. However, Warsh's communication style has been criticized, leading to expectations that he may offer fewer insights into near-term monetary policy. Analysts warn that his speech could further strain bond and foreign exchange markets.

The US's total debt has surged past $40 trillion, or roughly 120% of its GDP, a level reached in just over five years since surpassing $30 trillion in January 2022. This rapid increase in debt, exacerbated by factors such as tax cuts, the Covid-19 pandemic, and the One Big Beautiful Bill Act, has caused ripples in international markets. India's debt-to-GDP ratio is notably lower at around 83%, equating to roughly $3.5 trillion.

In an effort to stabilize long-term US government bond yields, Treasury Secretary Scott Bessent announced an increase in bond buybacks, intending to double the initial plan by the end of August. These bond purchases aim to boost demand and raise prices, thereby lowering yields. However, despite the Fed's apparent intentions to lower rates, yields have risen nonetheless, driven by concerns over inflation, unclear Federal Reserve policies, accelerating debt, supply shocks, and the AI boom's financing requirements.

The issue transcends the US, as Japan holds a significant $1.12 trillion stake in US government bonds. Japan's currency stabilization efforts, which involve selling dollars and purchasing yen, exacerbate the US's bond yield problem. To alleviate the pressure, the US has supported Japan's defense of the yen, demonstrating the interconnectivity of global financial markets.