Lost amid the constant media rotation are the staggering debts of the United States and the challenging task of refinancing, which could have severe consequences for the world economy. Typically, only two topics make it into the so-called Heavy Rotation, dominating the news cycle 24/7. Rapid switches occur from Kiev to Gaza, from the war in the Middle East to the conflict in Ukraine. But the audience misses the dramatic upheavals in the global financial markets, now becoming a whisper on Wall Street, in Frankfurt, London, and Hong Kong. The black swan, symbolizing the disruption of normalcy, has not landed yet, but it circles overhead in the dark. What lurks in the shadows often goes unseen.
The focus turns to the world’s largest debtor, the USA, which has significantly accelerated its pace of indebtedness this year while struggling to find new financiers for refinancing. In the tectonics of the global financial system, the tectonic plates are starting to shift. The seemingly innocent debt securities of the US Treasury, better known as US Treasury bonds, have experienced a breath-taking plunge since the onset of the COVID-19 pandemic. Seismographic devices report significant tremors:
1. The BlackRock iShares 20+ Year Treasury Fund, tracking long-term bond prices, has plummeted by 48% since April 2020.
2. Yields on 10-year US Treasury bonds, moving inversely to prices, recently surged to over 5%.
3. US financial institutions have accumulated unrealized losses of $650 billion by September 30, a 15% increase from June 30.
This rumbling from the American capital market is not surprising and has four concrete reasons:
1. Lack of Buyers for US Debt Securities
Unlike Japan or Germany, the US lacks significant domestic savings, requiring the acquisition of bond buyers abroad. China has been a reliable buyer, holding 26% of all US Treasury bonds at its peak. However, China is gradually withdrawing, reducing its holdings by $21 billion in August. The share of Chinese holdings in the total portfolio of US government debt is now just under 11%.
2. Interest Rate Speculation Disturbs Markets
Investors are uncertain amid a barrage of announcements about whether the US Federal Reserve will further raise or maintain interest rates at the current high levels, currently ranging from 5.25 to 5.50%.
3. Crisis Grows Through Concealment
The ongoing bond crisis is accompanied by silence from politics and major banks. Unlike well-known stock market crashes, little attention is paid to these enormous setbacks and the resulting need for corrections in the balance sheets.
3. Doubts About the Sustainability of US Debt
In 2023, the US government issued fresh bonds worth $18.3 trillion, a 31.9% increase compared to the previous year. The current US debt has surpassed $33.5 trillion, over two trillion more than in June.
Conclusion: The vulnerability of the USA is evident in the capital market. Its lifestyle, previously financed by patient investors worldwide, is not sustainable. The most dangerous opponent of the USA is not China, Russia, or Iran but its own short-term greed. The storm may not have hit yet, but the warning signs are unmistakable.