United States public debt: uncertainty is costly

BarcelonaThe debt of the United States has exceeded the threshold of 40 trillion dollars, above its gross domestic product (GDP), that is, the value of all the wealth it generates in a year, which exceeds 30 trillion. In the second term of President Donald Trump, which began in January of last year, about 4 trillion have been added due to the costs of the war with Iran. And the tariffs he had imposed globally stopped being collected after the Supreme Court annulled them. The solution will not come through other revenues, through tax cuts for companies and large fortunes. All of this, together with Trump's unpredictability, raises doubts about the economy of the world's leading power. Uncertainty has costs and is expensive.

Why is debt becoming more expensive for the U.S. Treasury?

In recent days, massive sales of United States public debt have been occurring. Investors are getting rid of their holdings due to fears of an increase in inflation. Prices are falling, and therefore, profitability is increasing, and consequently, what the administration must pay to bondholders. As the cost of living rises, the fixed interest paid by a bond loses purchasing power, and consequently, investors sell their holdings and demand higher yields to buy new ones.

The trend has forced Treasury Secretary Scott Bessen to multiply debt purchases and commit to cutting spending to reduce a growing deficit, which this fiscal year is projected to be around 6% of GDP; but the effects were short-lived. Investors doubt the credibility of these messages. The rest of the debt markets have also been affected.

Why are investors selling their securities?

A primary element that scares investors is the deficit of the United States government. Currently, expenses exceed revenues by more than 1.8 trillion, and the evolution of the war with Iran does not help reduce the gap. Investors doubt the strength of Washington's public finances, which have always been considered a safe haven. But in this environment, they increasingly demand more interest to invest.

Furthermore, there is fear of an inflation escalation due to the conflict with Iran. The Brent barrel, the benchmark quality in Europe, far exceeds the level of 90 dollars. And all of this coincides, furthermore, with the need for large technology companies to invest more than 600,000 million dollars a year in artificial intelligence (AI). Giants like Microsoft, Amazon, Apple, and Meta compete with the state to attract resources and must offer better interest rates. Since the beginning of the year, they have issued almost 400,000 million dollars in debt.

Why does profitability rise when the bond price falls?

Public debt grants a fixed payment (coupon), therefore, if the price falls, the yield rises. If a bond was bought for 100 dollars with an interest of 5%, the holder receives 5 euros. But if the price drops to 80, considering that the coupon is 5 euros, the yield rises to 6.25%. In the case of the United States, 30-year bonds have reached levels not seen in two decades, with more than 5.3%. The 10-year term, which is the benchmark used there for mortgages and other credits, is also climbing. The growing trend of spending more than is earned, and therefore increasing debt, worries investors, who want more interest to buy bonds. The issue is that any rise in yield, however small, represents a high cost for the state.

Currently, the United States administration allocates more than a trillion dollars annually to interest payments (equivalent to Switzerland's GDP), which are rising and already represent the second largest item of public spending. A large part of the debt is held by individuals, institutions, and companies in the US, but then about a third is held by foreign investors. The main foreign creditor currently is Japan, followed by the United Kingdom and China, which had been the first and gradually reduced its portfolio, especially with the tariff war initiated by Trump.

Why does it pose a risk to the global economy?

The increase in the profitability of US debt attracts capital that is withdrawn from developing economies and depreciates the value of their currencies, thus increasing the cost of servicing their external debt. At the same time, the cost of credit for families and businesses increases, because US bonds are the benchmark for the entire global financial system. Their rise is ultimately passed on to the interest on mortgages and other loans to individuals and businesses. And more attractive returns on US debt force the rest of the countries to offer higher interest to attract the capital they need to finance their debt.

And another effect is the increase in the cost of energy, which is paid for in dollars, a currency that is strengthening and therefore ends up increasing inflation in importing countries, where interest rates end up rising. In Spain, given the prospect of an increase in the price of money, the daily one-year Euribor, the benchmark for variable-rate mortgages, has exceeded the threshold of 3% for the first time since September 2024.

Other victims in these situations tend to be public investment or social spending, which are reduced because many governments have to dedicate more resources to paying more interest on debt.