US Bond Market Resets Expectations as Debt Levels Reach Record Highs

The US bond market may be resetting investor expectations about the country's fiscal health. Despite not being further downgraded, rising breakeven rates on inflation-protected bonds and higher costs of insuring against a federal default suggest investors are increasingly concerned about the nation's debt.

One reason for this is that economic growth has fallen behind borrowing. Historically, US debt dynamics were helped by faster-than-debt economic growth, but this relationship began to shift due to spending used to counter the 2007-2009 financial crisis and the COVID-19 pandemic.

The US crossed the $40 trillion debt milestone last week, with about $8 trillion of that money owed to itself. The remaining $32 trillion is owed to public creditors, including individuals, foreign governments, and the Federal Reserve. Those public debts now amount to roughly 100% of annual GDP.