US Annualized Debt Costs Exceed $800 Billion
The comments below are an edited and abridged synopsis of an article by Mark Cudmore
US yields have ongoing upside pressure from the debt-ceiling debate. Even if a one-year extension is achieved this year, as House Speaker McCarthy is reported to be proposing, that creates a far greater problem in a presidential election year.
Everyone cites 2011 as the playbook for debt-ceiling stress. While those negotiations may be the closest precedent we have, the 2023 episode is likely to be far worse for markets.
In 2011 the debt ceiling was a purely technical issue. At the time, US government debt was less than 100% of GDP and yields were low. The estimated annualized payments to service the debt were less than $450 billion per year.
It’s a different situation now. US debt is above 120% of GDP and the estimated annualized payments to service that debt rose to $773 billion as of January 31. Moreover, they are rising at an almost parabolic rate due to what’s happening to yields; that number has risen by more than $300 billion in just a year!
On most days, it’s an issue for Treasuries that is entirely dominated by other trading factors, but it will lead to random yield blowouts in the future.
The estimated annual cost of servicing the US debt exceeded $800 billion as of March 31; that’s more than 40% higher than any time prior to the past year.
Cudmore includes a chart that is only up to January 31. Since then, US yields have risen more than 20bps all the way out the curve.
The costs are still rising almost parabolically, so expect headline excitement when the $1 trillion figure is reached later this year.