The yield on 10-year US government bonds has surpassed 5%, while annual debt servicing costs have reached $1 trillion. However, the economy's growth, adjusted for inflation, stands at 8.5%, outpacing the average bond yield of 3.4%.
The US Bureau of Economic Analysis reported an 8.5% growth for the second quarter on an annual basis. However, the average yield of 3.4% also applies to earlier bond issues. According to TD Securities, the increase in expenses is fully reflected only as old bonds mature and new ones are issued at higher rates. The US does not refinance all its debt at once. The average maturity of US bonds, considering all issues, is approximately 5.9 years, and excluding short-term securities, the yield averages 3.1% per annum.
TD forecasts interest expenses of around $1.1 trillion in the 2026 fiscal year, $1.4 trillion in 2027, and $1.6 trillion in 2029 if current rates persist. According to the Congressional Budget Office, by the 2026 fiscal year, the national debt will exceed 101% of GDP. Consumer spending in the second quarter contributed approximately 2.5 percentage points to real GDP growth, while imports reduced it by about 1.6. "A financial apocalypse has not occurred yet," say Gennady Goldberg and Molly Brooks, strategists at TD Securities. TD links the rise in yields partially to a strong economy, the planned rate hikes by the Fed, and expensive oil. Yan Lingan from BMO Capital Markets noted that sustained growth supports the current situation. Matthew Rhys from L&G Asset Management warns that the slower the nominal growth, the more severe the debt burden becomes. In a BMO survey, 42% of participants believe the real estate market is the first victim of rising real rates, 26% pointed to stocks, and only 1% mentioned issues in the labor market. On Friday, the Hang Seng index in Hong Kong fell by 3%.
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