US Treasury Secretary Scott Bessent told G20 finance ministers and central bankers this week that the United States was a leader in addressing sovereign debt issues in emerging markets and low-income countries, but analysts said he was also grappling with serious debt issues closer to home.
With the US 10-year Treasury yield rising to a 20-month high of 4.78 per cent, Tuesday’s discussion in Asheville, North Carolina, landed amid a global sell-off of rich countries’ sovereign debt that has also sent benchmark bond yields in Japan and the United Kingdom to levels unseen in decades.
Analysts warned that the rise in yields was approaching worrying territory for the global economy as higher borrowing costs worked their way through to governments, companies and households and reduced the amount investors were willing to pay for stocks.
“We’re heading into the concern zone, which is the other side of 5 per cent for the 10-year Treasury ... where alarm bells would begin to ring,” said Padhraic Garvey, regional head of research for the Americas at ING.
Current levels were not a mispricing, Garvey said, but it would be a tipping point if the US 10-year yield rose past 5 per cent and the euro zone 10-year yield reached between 3.5 per cent and 4 per cent. The main driver behind the Treasury yield increase was not higher inflation expectations but higher real yields, he said, adding that was worrying for American companies because they could not increase prices to offset the impact.
As investors woke up to that risk, the underlying implication for various risk assets, including stocks, could be significant, he said. They would eventually realise that they had to discount future earnings at a structurally higher real yield, while rising yields would also have direct impacts on products such as mortgage rates.
Alicia Garcia-Herrero, chief economist for the Asia-Pacific region at French investment bank Natixis, said rising yields would also be an issue for companies seeking to raise money – especially artificial intelligence hyperscalers who were issuing debt.
“Everybody needs cash,” she said. “Cash is expensive now ... when the US Treasury yield goes above 5 ... you need to be an amazing company to pay below the Treasury.”
BNP Paribas economist Anis Bensaidani said the higher yields would also translate into higher debt-related costs for governments, such as interest, which would eat into their ability to foster public investment in areas ranging from social welfare and energy to defence and AI. It was “a cocktail of negative things for the global economy”, he said.
Garvey said rising yields would also make it more difficult for Washington to correct its debt dynamics as fiscal policies could not fix interest rates, which was partially the reason Bessent would not want the yield to get out of hand.
But analysts said Bessent was also in a difficult position as he tried to manage US Treasury yields. The Bank of Japan needed to increase its rates to support the yen against the US dollar, they said, adding the US also needed to cut its fiscal deficit – a challenging proposition.
“By design, Bessent – or any US treasury secretary – ends up being in a difficult position,” Bensaidani said, adding that while the holder of the office had to manage higher interest rates and a higher interest burden, which were related to fundamentals, fiscal consolidation was not popular and “politically costly”. -- SOUTH CHINA MORNING POST
