Financial Services Association, May 7 (Editor: Xiaoxiang) The total amount of US treasury bonds broke through the 34 trillion US dollar mark for the first time at the beginning of this year. And behind this massive amount of borrowing, the US Treasury's interest payments have also reached an astronomical figure in an environment of high interest rates.

Investors earned nearly $900 billion in annual interest on US government debt last year, which is double the average of the past decade, according to the US Treasury.

Since the yield on almost all maturing treasury bonds is currently above 4%, it is clear that this figure will rise further in the future.

According to estimates by the US Congressional Budget Office in February of this year, interest and dividends paid to individual investors alone will rise to $327 billion this year, more than double the mid-2010s, and will increase year by year over the next ten years.

In March alone, the US Treasury paid approximately $89 billion in interest to treasury bond holders. When converted, interest payments can reach about $2 million per minute...

There is no doubt that, to a certain extent, behind the astronomical scale of interest payments mentioned above, it is also an inevitable result of the US benchmark interest rate jumping from 0% to 5% or more within two years. Recently, there are two economic trends that indicate that the era of high interest rates will not end soon:

First, although inflation is gradually approaching the tipping point where the Federal Reserve might consider cutting interest rates, progress in the US CPI towards the 2% target has stalled recently. As a result, expectations of interest rate cuts have been postponed until at least this fall.

Second, and perhaps more importantly, the US economy is still maintaining good momentum — although the labor market showed some signs of cooling in April, which indicates that the Federal Reserve did not need to cut interest rates drastically when starting an easing cycle.

Federal Reserve Chairman Powell emphasized this wait-and-see attitude on the path of interest rate changes in his speech last week after keeping interest rates unchanged, and market traders currently expect to cut interest rates by only two 25 basis points by the end of the year.

Blake Gwinn, head of US interest rate strategy at the Royal Bank of Canada Capital Markets, said that currently no one is concerned about what problems will occur if the economy declines. Moreover, every month that passes means that interest rates have not been cut for another month.

Is the investment appeal of US bonds continuing to increase?

Obviously, under the lure of high yields, “fixed income assets” are also becoming worthy of their name in the US market for the first time in nearly a generation — after being “hijacked” by the zero-interest rate policy for nearly 20 years, US Treasury bonds have finally resumed their traditional role in the economy.

In other words, US Treasury bonds have once again become a source of income that investors can lock in and rely on year after year in the future.

Anne Walsh, chief investment officer of Guggenheim Partners Investment Management, said, “With the help of the Federal Reserve (maintaining high interest rates), investors are indeed putting revenue back into fixed income assets. Fixed-income investors can now benefit from higher yields. That's a good thing.”

According to a set of data, the asset size of money market funds that invest in short-term notes (such as treasury notes) swelled to a record $6.1 trillion last month. Meanwhile, according to EPFR data, bond funds have absorbed $300 billion and $191 billion in capital in 2023 and so far this year, respectively, reversing record capital outflows in 2022.

Furthermore, the size of US Treasury bonds sold directly to individuals has also increased dramatically. Federal Reserve statistics show that total debt held by households and non-profit organizations has surged 90% to a record $5.7 trillion since the beginning of 2022.

Dan Ivascyn, chief investment officer of PIMCO, said that the yield reset on various types of high-quality debt, from treasury bonds to corporate bonds, will have a broad impact on acquisition companies, hedge fund managers, and private finance companies. These companies have absorbed hundreds of billions of dollars when interest rates were at rock lows.

He also pointed out that compared to stocks, bonds are now showing “tremendous value.” According to a valuation model called the Fed model, US bonds are currently more attractive to US stocks than at any time since 2002.

“We're seeing far more investment inquiries about fixed income products than we've seen in the past 15 years,” Ivascyn said. “Investors are asking themselves: why should I make things more complicated (to do other venture investments) when I can easily get 6%, 7%, and 8% from bonds? So this has created a whole new group of buyers”.

The whole point of holding US government bonds is that, as a matter of common sense, these bonds will not default, are less volatile than stocks, and will provide a fixed rate of return higher than inflation.

Of course, if there's no risk at all, it's not inevitable. At any rate, America's huge deficit is likely to continue to widen, and it is almost certain that the US will finance it through a never-ending supply of new bonds. There may be no risk that this debt bubble will burst in the short term, but one day it may be confronted by everyone.

Editor/Somer