Soaring Debt and Deficits Raise Concerns for Economy and Markets

- The federal IOU is now at $34.5 trillion, or about $11 trillion higher than where it stood in March 2020. - Chatter has spilled into government and finance heavyweights, and has one prominent Wall Street firm wondering if costs associated with the debt pose a risk to the stock market rally. - The CBO estimates that debt held by the public compared to GDP will rise to “an amount greater than at any point in the nation’s history.”

Uncharted territory for debt and deficits

- The CBO numbers are ominous, as they outline the likely path of debt and deficits. - The watchdog agency estimates that debt held by the public, which currently totals $27.4 trillion and excludes intragovernmental obligations, will rise from the current 99% of GDP to 116% over the next decade. - That would be “an amount greater than at any point in the nation’s history,” the CBO said in its most recent update.

Market impact

- More immediately, there are concerns that rising bond yields could spill over into the equity markets. - “The huge obvious problem is that the U.S. federal debt is now on a completely unsustainable long-term trajectory,” analysts at Wolfe Research said in a recent note. - The firm worries that “bond vigilantes” will go on strike unless the U.S. gets its fiscal house in order, while rising interest costs crowd out spending.
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