Why is public debt soaring to levels of 20 years ago?

BarcelonaIn a world dominated by uncertainty and with a totally unpredictable President of the United States, public debt, which countries issue to finance themselves, has skyrocketed to yields like those of 20 years ago, in a crisis phase.

On a global scale, there has been an avalanche of sales of securities that have caused prices to fall. Consequently, they have increased profitability (less price, more return) and, therefore, the cost that states have to pay to attract capital is increasing. The consequences are not ethereal, as bets point to future interest rate hikes (the price of money) and, as a result, the increasing cost of both mortgages and credit in general for individuals and businesses.

And why has this movement of sales occurred in the debt market? The world is much more unpredictable than in previous years, energy costs have skyrocketed, and countries need to raise resources to pay their bills with competition from private tech companies that need funds to finance investments in artificial intelligence (AI). Experts attribute the current massive sales in debt markets to at least three elements.

War with Iran

One of the elements that worries investors is the increase in costs related to the war with Iran by the United States. This generates a deficit, the result of spending more than is earned, which leads to an increase in debt that exceeds 40 trillion (with a b) and is becoming more expensive.

This evolution raises doubts about the ability to pay. Investors are demanding more and more interest to buy public securities. In this context, the 30-year US Treasury bond has reached 2007 levels, above 5.3%; and Germany has issued 10-year debt at the highest cost since 2011. Securities are also being sold in Spain, France, and Japan.

Energy costs

The increase in investor sentiment is also influenced by the price of oil: Brent, the benchmark quality in Europe, has risen to over $90 a barrel due to the crisis in the Strait of Hormuz. The end of the 60-day truce between Washington and Tehran has sent nerves fraying.

This only serves to increase inflation forecasts. As the cost of living rises, the fixed interest paid by a bond loses purchasing power, and therefore, investors sell the securities they hold in their portfolios and demand higher yields on new issues to compensate for the loss in debt value.

AI Investments

A third important element is the issuance of bonds by tech companies such as Microsoft, Alphabet, Amazon, Meta, or Apple, in order to finance investments in artificial intelligence (AI), such as data centers and chips. These needs force companies to pay higher interest rates than those of sovereign (public) debt in order to be more attractive to investors.

This is money that ends up going to the private sector instead of the public sector. The large companies in the sector require investments of more than 600 billion dollars a year and have made debt issuances of almost 400 billion dollars so far this year.