(9 November 2023 – United States) Citi’s global strategists and economists have raised concerns of a “full-blown crisis” in the United States similar to the October 2022 meltdown in the United Kingdom gilt market.
In Citi’s report “The Ever-Rising US Public Debt” they posit surging US public debt could leave the US Treasury market vulnerable. US government debt is expected to hit about 115 percent of GDP by 2033, requiring an enormous US$20 trillion of Treasury bond issuance to investors.
A crisis would include a sharp, unexpected deterioration in demand for US Treasuries, causing a sharp rise in yields and risk premiums in credit and equity markets. US annualised debt interest payments crossed US$1 trillion in October. The cost of debt has doubled in the past two decades as federal deficits balloon while elevated interest rates have force borrowing expenses higher, compounding pressure on US debt.
“While we judge that a full-blown adverse scenario remains unlikely, last year’s UK gilt crisis offers a cautionary tale. In this case, the core strengths of the US economy give investors the confidence to purchase Treasuries, notwithstanding the ongoing political noise. Similarly, the effects of high debt levels on economic performance are limited” commented Citi Chief Global Economist, Nathan Sheets.
“Such an episode could resemble last fall’s stresses in the gilt market, but also be more sustained. The good news is that, in retrospect, the gilt crisis looks to have reflected a near perfect storm of events that seems unlikely to be replicated elsewhere. The bad news is that ‘unknown unknowns’ are by their nature unpredictable, and recent years have brought unrelenting surprises. As such, we interpret the UK gilt crisis as a cautionary tale for both the UK and other countries in the years ahead” Citi strategists added.