The US government can temporarily relieve pressure on the government bond market, but the measures taken do not solve the main problem - the huge and continuing increase in debt. James Sullivan, co-head of global fundamental research at JPMorgan, warned about this, comparing the current approach to paying a mortgage with a credit card.
The US Treasury Department plans to at least double the volume of government bond buyback operations. The program is scheduled to begin on September 9 and continue until November 4. In practice, the department buys part of the longer-term securities, while simultaneously issuing short-term debt.
According to Sullivan, such an approach can give a short-term result, but does not eliminate obligations. His analogy is indicative - The strategy is similar to refinancing a long-term loan with short-term borrowing.
“This is a bit like paying off your mortgage with your credit card,“ the expert said. According to him, such a scheme may work for a while, but over time the discrepancy between the terms and the amount of the obligations becomes more and more visible.
The US debt is about $40 trillion
The scale of the problem is significant. Sullivan points out that the US national debt is already approximately $40 trillion, while the total government debt in developed markets reaches about $76 trillion. Added to this is the strong issuance of corporate bonds.
The more securities are offered on the market, the more investors need to be attracted to buy them. If demand does not grow at the same rate, issuers may be forced to offer higher yields. This, in turn, means a higher cost to service the new debt.
The situation is also complicated by a change in the behavior of some traditional foreign buyers. China’s holdings of U.S. Treasury bonds have fallen to their lowest level in 18 years, according to data cited in the analysis.
The AI boom is also increasing demand for capital
Competition for money in debt markets is not only coming from governments. Companies are also increasing their borrowing, one reason being huge investments in AI infrastructure, data centers, the return of manufacturing to the U.S. and national security projects.
According to JPMorgan data, leading AI companies have issued about $200 billion in debt since the beginning of the year – 80% more than the same period a year earlier.
This means that the US government and the corporate sector are increasingly competing for investors' capital.
Pressure on the stock market too
The consequences can also be felt on Wall Street. When yields on government and corporate bonds rise, they become a more attractive alternative to stocks, especially at high stock market valuations.
According to JPMorgan, bond yields now exceed the earnings yield of companies in the S&P 500 index. This makes the choice between stocks and fixed income instruments more complicated for large investors.
JPMorgan's warning comes at a time when the size and price of US debt are becoming an increasingly important factor for global financial markets. More active bond buybacks may ease some of the short-term pressure, but the analysis says it doesn't change the fundamental problem - the need for more and more US debt to find buyers.