The numbers are in, and they paint a vivid picture of the U.S. national debt landscape that’s both overwhelming and full of opportunities. If you’re an investor, a financial enthusiast, or simply someone trying to grasp the current economic scenario, you’re in for a comprehensive guide. With the national debt standing at an astonishing $32.66 trillion and expected further increases, there are implications for yields, securities, and the market that everyone needs to understand.
Earlier this week, the rating agency Fitch downgraded the United States’ credit rating from AAA to AA+, marking a significant decision that has drawn attention from various stakeholders, including the White House and investors. Fitch justified the downgrade due to concerns regarding fiscal deterioration over the next three years, rising debt levels, and mounting worries about the government’s ability to pay its bills following repeated debt ceiling negotiations.
The impact on the markets was evident, with Wall Street closing lower following the announcement, although major brokerages do not expect a sustained impact, citing the more robust economy. The downgrade is primarily seen as symbolic but reflects an erosion of fiscal management confidence. This decision by Fitch marks the second time the U.S. has lost its AAA rating, positioning it alongside Standard & Poor’s in downgrading the nation’s creditworthiness. While the country still maintains a high rating and the bond market has largely shrugged off the downgrade, concerns remain over potential turbulence in markets, the economy, and political polarization.
In this blog, we will dissect these complex numbers, diving into marketable and nonmarketable securities, projected debt issuance, and what it all means from an investment standpoint. Buckle up as we explore the twists and turns of the Treasury’s latest moves and how you can potentially benefit from them.
1. The total US national debt has reached $32.66 trillion, composed of $25.7 trillion in marketable securities (those bought and traded by the global public, including central banks) and $6.9 trillion of nonmarketable securities (held by US government pension funds, the Social Security Trust Fund, etc.).
2. The Treasury Department plans to issue an additional $1.01 trillion in debt due to lower-than-expected revenues and higher-than-expected expenditures. A further increase will follow this in borrowing to $852 billion during the next quarter.
3. Considering the massive supply of Treasury securities coming to the market, yields will likely rise to attract sufficient buyers. The issuance of longer-term securities (2 to 30 years) is expected to increase significantly, calling for a higher yield rate to entice investors.
U.S. National Debt Spikes, The Market to Absorb Treasury Securities
Today, we bring you stunning numbers that tell a concerning tale about the United States economy. Have you ever wondered about the significance of the country’s national debt? The total U.S. national debt has spiked by an alarming $1.19 trillion since the debt ceiling was lifted. It now stands at a substantial figure of $32.66 trillion. Sounds daunting, doesn’t it? Imagine having to cater for such a remarkable sum. Now, why does this matter to you, an investor?
Differentiating Treasury Securities: Marketable and Nonmarketable
Let’s break it down in more simple terms. This $32.66 trillion debt comprises two categories of bonds, namely, Treasury securities. They include Nonmarketable Treasury securities – valued at an estimated $6.9 trillion; these are Treasury bonds predominantly purchased by U.S. government pension funds and the Social Security Trust Fund. The larger portion, $25.7 trillion, is composed of Marketable Treasury securities. These are Treasury bonds held and traded by everyday citizens and central banks globally. This includes the Federal Reserve (the Fed).
Since lifting the debt ceiling on June 2nd, marketable securities have dramatically increased $1.05 trillion. Now think about this, isn’t that a sizeable surge?
Expected Future Debt Issuance
For the remainder of the year, the Treasury Department projects to issue an additional $1.5 trillion of debt. This is more than any of us anticipated, isn’t it? The Treasury Department today raised its borrowing plans to deal with unfortunate lower-than-expected revenues and higher-than-expected outlays, resulting in the deficit spiraling out of control.
Debt Issuance this Quarter
Want to know what to expect this quarter? A whopping $1.01 trillion in extra debt. That means that the government will issue over $1 trillion in marketable securities this quarter. Guess who has to buy it? Yes, that’s right, market investors like you. Do you remember the last time the government released securities at this pace? Not sure? Well, it was in 2020 when the Fed was buying these bonds hurriedly.
The Market’s Response
However, now the scenario is strikingly different. The Fed is stepping away from these securities at a rate of about $60 billion a month. That leaves a considerable gap that investors like you need to fill. How does the Treasury Department justify this move? Well, they have given three significant reasons for this $274 billion increase in new issuance this quarter, which include wanting to raise the balance in their checking account and the discrepancy between projected and actual financial events.
The Treasury Department plans to borrow an additional $852 billion in the next quarter and $1.85 trillion in the year’s second half. These numbers might be overwhelming, but from an investment standpoint, they offer an opportunity. Yield, the annual interest you’ll earn on these securities, is expected to solve all demand problems.
Yields – A Solution to Demand Problem? Are Long-Term Securities a Good Bet?
Think about it this way: The riskier the bonds are (or, the more the government borrows), the higher the yield may need to be to attract purchasers like you. Increasingly, the government has been issuing Treasury bills and Cash Management Bills – both short-term lending instruments. However, it is now expected to announce a substantial increase in the issuance of longer-term securities – Treasury notes and bonds, creating an enormous supply of such securities.
Investment Perspective: It’s about the Yield!
From an investor’s perspective, this situation may be desirable. Treasury bills pay about 5.5%, while the 10-year yield is around 4%. Therefore, the increased supply might lead to higher yields, which could make these longer-term securities lucrative for investors. Intriguing, isn’t it?
While the rising national debt and the increasing issuance of these securities may sound alarming initially, understanding the mechanics behind this situation could present you with an investment opportunity. Your next step might involve these Treasury securities or hard assets such as commodities, gold, etc. Time to chew on that, investors!