From Washington to Wall Street, and increasingly around the world, investors and policymakers are becoming more concerned about rising debt and the higher interest rates needed to finance it.
In Washington: Bloomberg’s Greg Ritchie, Michael MacKenzie and Ye Xie reported Sunday that Treasury Secretary Scott Bessent appears increasingly focused on preventing long-term Treasury yields from moving substantially higher.
- They point to two recent moves. First, the U.S. participated in its first currency intervention to support the Japanese yen since 1998, reducing concerns that Japanese investors could sell U.S. Treasuries and move money back home.
- Then, the Treasury made a subtle change to its quarterly borrowing guidance that investors interpreted as opening the door to potentially reducing future sales of longer-term debt.
Conclusion: Taken together, Bloomberg concluded that Bessent appears to be using the tools available to him to contain long-term borrowing costs.
Zoom out: The problem isn’t limited to the United States. Robin Brooks of the Brookings Institution argues that the global COVID-era debt binge, increasingly loose fiscal policy and geopolitical instability are combining to push long-term government bond yields higher around the world.
- Brooks believes governments will increasingly pressure central banks to prevent yields from rising too far. That, however, could create new concerns about central-bank independence and increase demand for traditional safe havens such as gold and currencies including the Swiss franc.
Meanwhile, on Wall Street: Debt problems are also beginning to surface in private credit. The Wall Street Journal’s Matt Wirz reports that recent quarterly results from some of the industry’s largest funds show weakening loan performance and investor returns.
- The good news is that defaults remain below levels experienced during major periods of financial stress, including the COVID pandemic and the 2015 oil-price crash.
The bottom line: Lower interest rates could relieve pressure on government finances, private borrowers and financial markets. The problem is getting rates lower without reigniting inflation. That’s increasingly becoming one of the biggest challenges facing policymakers and investors around the world.