The US long-term national debt rate rose significantly this year, with the annual US debt return rising by 5.2 per cent, reaching a high since 2007, with the annual rate of return remaining at around 4.7 per cent. Market concerns have shifted from the level of interest rates per se to why rates of return continue to rise and how this can be channelled to housing, business finance and stock markets.
Deficit expansion pushes debt overhang
The increase in the rate of return was driven, first and foremost, by the continued expansion of the United States debt. The United States federal debt has exceeded $40 trillion, of which approximately $32.3 trillion is held by the public. The widening of the deficit meant that the Ministry of Finance needed to issue more national debt, with the concomitant increase in the supply that the market needed to absorb.
Inflation expectations are also important. If investors believe that inflation will remain high, they will require a higher rate of return to offset the risk of erosion of the purchasing power of future bond cash flows. The recent rise in oil prices above $90 per barrel has also heightened these concerns.
Long-term dollar debt needs are weaker
In addition to increased supply, the demand side of long-term dollar debt is also weakening. The interest of overseas investors in United States Treasury debt has declined, while corporate debt issues are high, and part of the financing is linked to the AI investment boom. This means that more funds are being allocated to investors in competition for national debt.
The United States Treasury debt return is an important pricing benchmark for financial markets. One of the most direct effects of the upward trend in long-term rates of return is the increase in the cost of mortgage loans. The fixed annual mortgage rate has remained at around 6.7 per cent in the near future and the affordability of housing continues to be under pressure.
Stock market valuation faced repricing
The cost of business finance will also increase. Whether it is new debt or refinancing existing loans, enterprises may need to pay higher interest. This would reduce the profit space and could weaken the willingness to invest. This pressure is even more pronounced in industries with higher capital expenditure, such as AI infrastructure.
A high rate of return is usually not conducive to stock valuation. On the one hand, when the United States Treasury debt provides a higher risk-free return, the attractiveness of equities to some of the funds will decline; on the other hand, the increased discount rate used in valuations will reduce the present value of future profits, and growth and technology equity will tend to be more sensitive.
The United States Department of the Treasury has recently eased pressure by increasing long-term public debt buy-backs, leading to a short-term fall in return rates. But the market is still more concerned with the deeper factors of persistent deficits, inflation concerns and an increase in the supply of public debt.