Title: US Government Faces Higher Borrowing Costs Than Vietnam as Bond Yields Surge
Strange things are happening in the debt markets as the US government, with its AA+ credit rating, is now paying more to borrow than junk-rated Vietnam. This surprising development is a result of the Federal Reserve’s aggressive actions against inflation, which have led to a sharp increase in Treasury bond yields.
The US 10-year bond yields currently stand at around 4.5%, nearly triple the level at the end of 2021. In comparison, Vietnam’s yields are approximately 2.8%. This reversal in borrowing costs challenges long-standing conventions in the bond world.
Global debt markets are crucial for moving large amounts of money between borrowers and lenders, ranging from governments and central banks to companies and financial institutions. The total global debt reached a staggering $235 trillion by the end of 2022, almost ten times the size of the entire US economy.
The structure of these markets is built on trust and a clear hierarchy based on creditworthiness. Previously, the US, being the largest economy and home to major businesses, was considered a prime destination for global investors. Consequently, the American government could borrow money at lower costs compared to emerging-market nations with weaker credit ratings.
However, the Federal Reserve’s efforts to combat inflation have disrupted this conventional wisdom. The Fed has raised its benchmark rate by over 500 basis points in the past 20 months, causing Treasury bond rates to surge. The rate on benchmark 10-year Treasurys has nearly tripled to 4.5%, although it has recently retreated from its 16-year high.
As a result, the US government’s borrowing costs have surpassed those of developing nations such as Vietnam, Morocco, and Bulgaria, despite their inferior credit ratings. For instance, Vietnam’s debt is rated BB+, the “highest speculative grade” by S&P Global ratings. In contrast, the US is rated AA+, indicating a very strong capacity to meet financial commitments.
The higher US yields also reflect investor concerns about the nation’s deteriorating public finances. Over the past decade, US total debt has more than doubled to $33.7 trillion, exceeding the nation’s GDP by 25%. Moody’s Investors Service recently downgraded its outlook for the US credit rating to negative, citing the growing debt burden and high interest rates.
This unprecedented situation has surprised market participants, with Jeff Weniger, head of equities at WisdomTree Asset Management, expressing his disbelief on social media. US bond yields have even surpassed those in emerging markets like Morocco and Bulgaria, as well as Greece, which faced a sovereign debt crisis a decade ago.
The implications of these upside-down bond dynamics highlight the evolving landscape of global debt markets and the challenges faced by the US government in managing its borrowing costs. The situation also underscores the importance of monitoring public finances and credit ratings as indicators of economic stability.
Note: This article is a rewritten version of the original article published on Business Insider.
