The global financial community is taking note as Norway’s sovereign wealth fund, the world’s largest, signals a significant reduction in its US government bond holdings. The fund plans to cut its approximately $215 billion (€186 billion) stake by $80 billion, a move that underscores a growing investor suspicion towards the escalating US debt burden. This comes as the United States national debt officially surpassed the $40 trillion mark in August, with the yield on 30-year US Treasury bonds recently climbing to nearly 5.4%, a level not seen since 2007.
Mounting Debt, Rising Costs
For highly indebted nations like Japan, where debt exceeds 200% of economic output, borrowing on capital markets has become increasingly expensive. This trend is also impacting Italy, France, and the UK. Germany, while in a comparatively better position with a debt-to-GDP ratio around 65%, anticipates this figure to rise towards 80% as it finances modernization of its armed forces and infrastructure.
The United States is now facing a stark reality: annual interest payments on its debt have surpassed $1 trillion, equating to over $3 billion daily, according to the Congressional Budget Office. Since 2024, the cost of servicing its debt has exceeded its entire military expenditure. The Federal Reserve Bank of St. Louis notes that US national debt has ballooned by approximately 650% over the past three decades, from $5.2 trillion in 1996 to over $40 trillion this summer. The US budget deficit is projected to reach nearly 6% in 2026, a target for reduction by Treasury Secretary Scott Bessent that many analysts deem unrealistic given ongoing military spending and revenue shortfalls from corporate tax cuts and struck-down tariffs.
Investor Unease and Market Demands
Carsten Roemheld, a capital market strategist at Fidelity International, commented to DW, “That is a very difficult path.” He added, “Nervousness is also rising sharply within the US administration – that is clearly evident. If this trajectory continues, it will be very difficult to sustain.” The rapid accumulation of debt is striking: the $10 trillion mark was breached during the 2008 financial crisis, $20 trillion in 2017, and $30 trillion by early 2022. The subsequent $10 trillion increase to $40 trillion occurred in just four and a half years.
In an attempt to temper rising yields, Secretary Bessent announced on September 9th a tripling of long-term US government bond buybacks, from $2 billion to up to $6 billion. However, Roemheld cautioned, “The measure is, of course, far too small on its own to truly keep yields in check over the long term.” Kim Crawford, global fixed income portfolio manager at JPMorgan Asset Management, told the Financial Times that “the bond market [now] demands discipline,” a sentiment that many governments appear unwilling to embrace through spending cuts.
US Dominance Persists, But Competition Rises
Despite these concerns, most economists agree that the US capital markets remain indispensable for investors. Carsten Brzeski, chief economist at ING Bank, stated, “The European capital market is not yet an alternative to the US market.” He also noted that China and other emerging markets are neither able nor willing to fill this void. “That is why I believe investors – even though they currently fear higher inflation and question the sustainability of US sovereign debt – will not turn away from the US,” Brzeski added, “At least not as long as the US economy is growing.”
Roemheld sees no immediate risk of a US default, given its ability to print money. However, he warned, “But this course of action will undermine confidence.” This erosion of confidence can manifest in the dollar’s exchange rate, particularly if international investors become less inclined to fund US deficits. The ongoing conflict in Iran, potentially driving up military spending and energy prices, further suggests the US may face higher interest rates.
Adding another layer of complexity, Robert Sockin, chief US economist at PGIM, points to the burgeoning demand for AI-related corporate bonds, which are increasingly “crowding out government bonds.” Roemheld concurs, explaining that major tech companies are issuing substantial debt to finance AI infrastructure. “The four major ‘hyperscalers’ alone – the companies building platforms for the US AI industry – have already raised over $800 billion in debt this year, a figure expected to rise further over the next year or two,” he noted. This presents a compelling alternative for investors who once sought safety in US Treasuries but are now finding attractive yields, sometimes with spreads of 100 basis points over Treasuries, from high-quality companies like Alphabet or Microsoft.
The era of readily available, low-cost government debt for the United States appears to be drawing to a close, as a confluence of rising debt levels, increased investor scrutiny, and burgeoning corporate debt markets reshapes the investment landscape.
