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

BarcelonaIn a world dominated by uncertainty and with a completely unpredictable President of the United States, public debt, which countries issue to finance themselves, has soared 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 (at a lower price, higher yield) 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 increased cost of both mortgages and credit in general for individuals and businesses.

And why has this movement of sales in the debt market occurred? The world is much more unpredictable than in previous years, energy costs have soared, and countries need to raise resources to pay their bills with competition from private technology 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 increasingly 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 US Treasury bond at 30 years has reached 2007 levels, above 5.3%, which has forced the country's Treasury to intervene with more purchases to moderate profitability; 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 climbed to over $90 a barrel due to the crisis in the Strait of Hormuz. The end of the 60-day truce given by Washington and Tehran has sent nerves soaring.

This only serves to increase forecasts of inflation hikes. 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 of 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. Large companies in the sector require investments of more than 600,000 million dollars per year and have issued debt of almost 400,000 million dollars so far this year.