Three different scenarios for US debt
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.
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.
