Consequences of rising US debt

Jamie Dimon, chief executive officer of JPMorgan Chase, the world's largest bank by market capitalization, recently warned that a crack in the US bond market was imminent.

- RAJESH KUMAR

Undoubtedly, the prediction is dire, and if it comes true, the consequences for financial markets and the global economy could be severe. The US has the largest and most liquid government debt market in the world. Since global financial markets are deeply interconnected and interdependent, a dislocation in the US debt market can impact practically every financial asset across the world, with significant implications for the real economy.

The yield on the 30-year US government bond recently crossed the psychological 5 per cent mark. The yield on 10-year US government bonds has also inched up, underscoring that investors now expect higher compensation for holding US government bonds due to a perceived increase in risk. Rating agency Moody's recently downgraded US debt. Given that the other two major rating agencies had already done so, it is for the first time in over a century that the world's largest debt market doesn't have a triple-A rating.

A budget deficit worth over 6 per cent of GDP, compared to the past 50-year average of 3.8 per cent. Notably, the US is running a higher deficit despite favourable labour market conditions. Given the expected surge in debt stock, a significantly higher proportion of expenditure will go towards interest payments (see chart).