Would you have had a happy birthday with $40-trillion in debt hanging over your head?
If not, spare a thought for US treasury secretary Scott Bessent, who blew out the candles for his 64th birthday on Friday, well aware that his efforts to wrangle this monstrous debt into shape has seen the US’s $32-trillion bond market turn against him.
On Wednesday, Bessent said he would double the amount the US government spends to buy back its own bonds, from $2bn to $4bn or more per operation. By buying back bonds – notably the 10-year and 30-year Treasury bonds – Bessent hoped to reduce the “yield” paid for these bonds and reduce the cost of debt.
For a time, it seemed like it may work. Yields initially fell – but then rose again. In the end, the yield on the 10-year treasury ended the week at 4.737%, higher than the 4.695% of a week before. Yields on 30-year US Treasuries rose to 5.25%, close to levels last seen in 2007. Little wonder that Nomura International strategist Charlie McElligott labelled the move “a band aid on a bullet hole.”
For ETM Analytics George Glynos, “basically what he’s done is tantamount to paying off your bond with your credit card.”
Rate hike by another name
“They’re trying to contain what’s happening in US treasury yields because so much leverages off it – like bond rates for houses and corporate borrowing. If you are seeing your bond yields rising like that, essentially what you are watching is a rate hike by a different name,” he explains.
US debt levels pierced a historic level of $40-trillion for the first time last week. According to Reuters, the federal government’s debt has more than doubled in less than a decade, from $19.95-trillion when Trump was first sworn in, in January 2017. While much of the increase in borrowing took place during the Covid years, America’s war with Iran has piled on additional pressure, as has the Supreme Court’s decision to disallow the trade tariffs imposed by Donald Trump last year, which would have funded his landmark, $2.5-trillion One Big Beautiful Bill.
“If you look at the customs duties that they were collecting, it was approximately $32bn a month; over a year that’s north of $360bn; over ten years, that’s some $3-trillion,” Glynos points out. That money is no longer forthcoming.
Now, writes the Financial Times, “most investors expect the Treasury to balance higher buybacks of long-term securities by issuing more short-term debt – a move that leaves the department exposed to fluctuations in interest rates.” This is almost the same strategy pursued by former Treasury secretary Janet Yellen two years ago, a strategy Bessent panned.
Compounding his problem is that central banks worldwide are offloading US treasuries. In Japan’s case it’s to defend their currency, in the case of China, it’s a geopolitical step to reduce the country’s exposure to America whilst at the same time rotating into the likes of gold.
For Glynos, the only way the US can control its bond yields is if the Federal Reserve “gets stuck in again in some form of quantitative easing,” or, if the US learns to live within its means.
Bessent himself argues that there is “nothing magic about the $40-trillion figure” and says the US will grow its way out of its debt.
A pivotal moment for South Africa
The ordeal is curiously reminiscent of one of the pivotal economic moments of post-apartheid South Africa, when SA’s new government tried to take on the bond market and failed spectacularly.
In the first two years after democracy, South Africa had been welcomed enthusiastically back into global capital markets, foreign money poured in and the government dismantled the financial rand, the exchange-control mechanism that had partly insulated the country from capital flight.
Then, in February 1996, sentiment abruptly turned. Rumours about Nelson Mandela’s health, uncertainty over economic policy and later the appointment of Trevor Manuel as finance minister helped trigger a rush out of the rand, which fell from about R3.60/$ to roughly R4.70/$ by year-end.
The Reserve Bank initially fought the decline, selling foreign currency, expanding its increasingly hazardous forward book and raising interest rates. Prime eventually reached 20% – incredible by today’s standards. Between 15 and 29 February 1996 alone, the Reserve Bank’s net open forward position jumped by about $1.3bn, to $8.15bn. By the end of 1996 it had swollen to about $22.2bn.
The ANC faced a brutal cross-roads. But, in June of that year, just four months after the currency began sliding, the Mandela government unveiled GEAR – Growth, Employment and Redistribution – committing itself to fiscal consolidation, lower inflation, trade liberalisation, gradual relaxation of exchange controls and a more market-oriented growth strategy.
There was no Mexican-style default, banking collapse or IMF bailout; instead the country absorbed the shock through a weaker rand, punishingly high interest rates and slower domestic demand.
Today, the US’s woes have proved a boon for both the JSE’s commodity stocks and the currency. As the dollar slipped last week, gold spiked 4%, and platinum – of which SA is the biggest exporter – rose 5.8%. This is largely why the Rand has strengthened to just on R16 to the dollar.