Why the era of cheap government debt is over

When Norway's sovereign wealth fund announced plans to reduce its holdings of US government bonds, the global financial community took notice. According to Reuters, Norway intends to cut its US bond holdings, currently valued at around $215 billion, by $80 billion. As the US national debt surpassed $40 trillion in August, global investors began viewing US debt with suspicion. In September, the yield on 30-year US Treasury bonds rose to nearly 5.4%, the highest level since 2007.

For countries with high debt levels, such as Japan, Italy, France, and the UK, borrowing has become increasingly expensive. Germany, with a debt-to-GDP ratio of around 65%, is in a better position but still faces challenges as its debt is projected to increase to 80% of GDP in the coming years. The US now spends over $1 trillion annually on interest payments – more than $3 billion daily.

The Federal Reserve Bank of St. Louis reported that the US national debt has risen by approximately 650% over the past 30 years, from $5.2 trillion in 1996. This year, the US budget deficit is expected to reach nearly 6%. However, Treasury Secretary Scott Bessent aims to cut the deficit in half – a goal seen as unrealistic due to the high cost of the Iran war, corporate tax cuts, and the recent Supreme Court ruling on tax tariffs.

Bessent has resorted to a special measure to lower US bond yields by tripling the volume of long-term US government bond buybacks from $2 billion to as much as $6 billion. However, this measure is insufficient to maintain low yields in the long term. Fidelity International's Capital Market Strategist Carsten Roemheld stated that nervousness is rising within the US administration, emphasizing the difficulty of sustaining this trajectory.

Despite the challenges, most economists agree that investors currently have no alternative to the US market. European capital markets are not yet an alternative to the US market, and emerging markets like China and other countries are neither able nor willing to assume this role. Fidelity's Roemheld believes that investors will continue to rely on the US, even if they fear higher inflation and question the sustainability of US sovereign debt.

However, he notes that this could undermine confidence, potentially affecting the dollar exchange rate.