Introduction
Welcome to our ‘Discourse on Debt’ first edition of a monthly bond market commentary from Appomattox. Given the steep rise in interest rates and the absolute levels of government debt in the US and around the world relative to GDP over the past few years, the opportunities and risks of debt market investing appear to be elevated for the first time since the 2007-2009 Global Financial Crisis. Look no further than Silicon Valley Bank for how strong franchises can quickly unravel due to rapid changes in rates.
Commentary
According to the Peterson Foundation, US government debt now stands at $33.5 trillion or about 120% of GDP. The average maturity of treasuries has been pushed out to just over 6 years. In response to Covid and the great financial crisis, the federal government has kept yields artificially low for well over a decade, lowering borrowing costs for consumers and businesses, while delaying recession or even depression from these multiple shocks to the economy.
That low-rate era appears to be over. Yields on the benchmark 10 year are now up over 400bp from the lows in 2020. To put that increase in perspective, the US 2023 budget is roughly $5.5 trillion, per the Peterson Foundation. If rates remain elevated, the incremental cost of servicing the debt will go up $1.3 trillion over time or roughly 23% of the entire US Budget. For a long time, there had not been the political will to raise taxes or cut spending on both sides of the aisle. The only “easy” way out is to inflate the currency which is also painful to the economy and voters.
A return to 1970s style stagflation seems possible, which would inflict enormous pain around the world. Governments have risen and fallen over time due to these factors. For example, during the 1970s, the governments of Ronald Reagan and Margaret Thatcher were accompanied by the deadly combination of high inflation and unemployment. We are keeping a watchful eye to see if history repeats.
This document does not constitute or form part of any offer of asset management products or services in any jurisdiction. Furthermore, this document does neither constitute an offer of asset management products or services.
The value of investments and any income generated may go down as well as up and is not guaranteed. You may not get back the amount originally invested. Past performance is not necessarily a guide to future performance. Changes in exchange rates may have an adverse effect on the value, price or income of investments.
The information and opinions contained in this document are for background purposes only, and do not purport to be full or complete. No representation, warranty or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained in this document by any of Appomattox Advisory, Inc., its partners or employees and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained in this document.
Significant differences in returns, risks and correlations may occur within sub-periods of the periods shown. Historical investment performance and market characteristics may not be indicative of future investment performance or market characteristics. There are frequently sharp differences between the hypothetical performance results and the results subsequently achieved by any particular trading or investment program.
