At a certain point, if you borrow too much money, lenders may question your ability to repay all the debt.
"U.S. Treasuries are currently facing an 'attack' from global markets.
This week, the dollar rose alongside increasing U.S. Treasury yields, bringing risks to global markets. The yield on the 10-year U.S. Treasury surged from 4.15% to 4.4%, nearing the alert level of 4.5%. If it breaks through 4.5%, the U.S. stock market will face a wave of sell-offs.
Behind the surge in U.S. Treasury yields, in addition to market expectations that the Federal Reserve may signal a pause in interest rate cuts, is also partly due to the largest bond buyers withdrawing from long-term U.S. Treasuries - the liquidation of U.S. debt has escalated sharply.
This week, bond giant Pacific Investment Management Company (Pimco) announced it is reducing its exposure to long-term U.S. bonds due to concerns over rising federal deficits and debt. This move marks an intensifying focus in the financial markets on massive budget deficits and federal debt, which has reached $36 trillion.
The U.S. has a unique position because the dollar is the global reserve currency and Treasuries are the global reserve asset. However, if too much borrowing occurs, at some point, lenders may question repayment abilities.
1. Given the trajectory of U.S. debt growth, Pimco emphasized three preferred alternatives: first, short-term and medium-term bonds: compared to long-term bonds that are highly sensitive to Federal Reserve interest rates, short-term and medium-term bonds offer attractive yields to investors while reducing interest rate risk.
Second, global diversification: Pimco is diversifying its interest rate exposure globally, particularly mentioning bonds from the UK and Australia, which it views as high-quality issuers with stronger fiscal conditions than the U.S. Third, corporate bonds: Pimco prefers to lend to high-quality corporations in public and private markets.
2. In the report released this week, the world's largest actively managed bond fund manager mentioned the term "bond vigilantes". This term was coined by Wall Street veteran Ed Yardeni in the 1980s to describe the behavior of traders who protest huge deficits by selling bonds to drive up yields. Although there is no coordinated organization of "vigilantes" acting at specific debt levels in the market, clues to predicting the actions of "vigilantes" can be found by observing the behavior of the largest bond investors.
3. Recent U.S. Treasury auctions have shown signs of weak demand, which has pushed Treasury yields higher. Especially after Trump won the presidential election, his tax cut plan was believed to deepen the deficit, further affecting market sentiment.
4. Current public debt (the amount the U.S. borrows from external markets) has reached about 100% of GDP and is expected to soon exceed the historical peak set after World War II. However, this is happening against a backdrop of no major global disasters and a still-strong economy.
If the Federal Reserve sends a hawkish signal that is difficult for investors to understand next week, or if any subsequent U.S. Treasury auction is unusually weak, then the U.S. Treasury market will quickly become the storm center of global markets.
