Three different scenarios for US debt

Giles Coghlan LLB, Lth, MA Financial Source

Back in 2013 the then-Fed Chair, Bernanke, promoted a surge in bond yields. Memories of this event have come back to investors at the start of the year as a couple of Fed speakers spoke about the Fed tapering bond purchases by the end of this year. This sent US bond yields higher. However, Powell was quick to quieten the impact of those voices on the market as he did not want a repeat of the ‘taper tantrum’ back in 2013. Why? It is due to this simple dynamic. Rising yields equals rising interest costs for the US in servicing their debt. See here for the impact on the US 10 year bond yields in 2013.

Rising debt costs

Bloomberg Economics published a chart that projected debt interest rate costs as a share of the United States GDP. They looked at three different scenarios. A 100bps shift in the yield curve (similar to 2013’s shift). A 200bps shift and a base rate case.

You can see the impact of these scenarios on the chart below.

Extra debt means larger repayments.

Why the Fed fears another ‘taper tantrum’?

It is no surprise that an increase in debt levels for world governments will necessarily mean larger repayments. However, a 100bps rise in the yield curve will mean a debt interest payment that is over 4% of the US’s GDP. A 200bps rise will equate to around 6%. So, this is why the Fed does not want to repeat the taper tantrum of 2013 and would like to keep rates as low as possible, for as long as possible.

Learn more about HYCM

Author

Giles Coghlan LLB, Lth, MA

Financial Source

Giles is the chief market analyst for Financial Source. His goal is to help you find simple, high-conviction fundamental trade opportunities. He has regular media presentations being featured in National and International Press.

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.