Energy leads S&P 500 sector gainers; Comm svcs weakest group
Euro STOXX 600 index closes down 0.2%
Dollar dips; U.S. crude up slightly; gold, bitcoin both gain >1%
U.S. 10-year Treasury yield edges up to ~4.71%
The $40 trillion question: why markets aren't worried yet
According to some reporting sites, the U.S. national debt is either nearing or has crossed the historic $40 trillion mark. Yet investors are more focused on borrowing costs and economic growth than on the headline figure itself.
As economist Ben Emons, founder of FedWatch Advisors, notes, federal debt has grown much faster than the economy for decades. Since 1970, federal debt has grown by roughly $760 billion a year on average, outpacing the roughly $470 billion annual increase in nominal GDP. Even so, investors have largely shrugged off concerns about sustainability.
Emons argues that borrowing costs remain manageable. According to Emons, the "equilibrium" interest rate needed to stabilize the debt-to-GDP ratio is around 7%, while the Treasury's average borrowing cost is closer to 3.5%. In other words, the U.S. is still financing itself well below levels that would trigger serious debt stress.
That helps explain why Treasury yields finished lower last week despite renewed scrutiny of government borrowing and lackluster demand at some recent debt auctions.
Still, investors appear to be preparing for higher rates. Consumer surveys show expectations for rising interest rates are climbing, while Treasury forward markets suggest yields could move significantly higher over the coming decade.
For Emons, however, the bigger concern isn't the debt itself but how it is being financed.
Interest payments on federal debt have already climbed above $1.1 trillion, and an increasing share of borrowing is being funded through short-term Treasury bills. Emons warns that a potential "risk-free crisis" could emerge if investors begin pulling money from the nearly $8 trillion parked in money market funds just as longer-dated bond portfolios continue struggling with duration risk.
Such a shift could drain liquidity from the front end of the Treasury market, push yields higher, and tighten financial conditions. If that feedback loop takes hold, Emons argues, stress could emerge even in the Treasury market, the foundation of the global financial system and an asset class long viewed as risk-free.
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