US debt worries financial markets

Following the approval of Donald Trump 's mega budget bill in the US Congress last Thursday, a political victory for the Republican president, markets are now watching its consequences, with US debt at an all-time high.

The interest rates that the world's leading economic power needs to pay to obtain credit on the markets are at high levels and investors are beginning to question the sustainability of American debt.

The United States' debt currently stands at more than $36.2 trillion, equivalent to 120% of the country's GDP, according to the US Treasury.

About $29 trillion (R$157 trillion) is in debt securities that the government sells on the bond market. Most of it is held in the United States, but a third of the public debt is held by foreign countries, mainly Japan , the United Kingdom and China .

Furthermore, since 2020, following a first trade war between China and the United States, the Chinese have been “dumping US debt to acquire gold. They are not selling the bonds, but they are also not renewing them when they reach maturity,” explains Aurélien Buffault, bond manager at Delubac AM.

The remaining US$7 trillion (R$39 trillion) is in the hands of the United States federal administrations, such as funds earmarked for social security or federal employee pensions.

US debt is generally attractive in financial markets because it provides a stable and secure return on investment.

However, when the world's largest economy shows signs of weakness, investors become more reluctant to lend money and demand higher interest rates to compensate for the risk.

In late May, the yield on the 30-year US Treasury note crossed the symbolic 5% threshold and is now hovering around 4.80%.

“The basis of these fears stems from the ‘Big and Beautiful Law’” promoted by Donald Trump and approved this Thursday, says Gregoire Kounowski, investment advisor at Norman K.

The measures in this law “seek to extend the tax breaks determined by Donald Trump in his first term”, which could “increase the American debt by between US$ 3 trillion and US$ 4 trillion”, he says.

When Moody's downgraded the United States' debt rating in May, it used the increase in debt and its cost to the federal budget as justification.

“This was a wake-up call for the market and put the trajectory of US debt at the center of concerns,” says Raphaël Thuin, director of capital markets strategies at Tikehau Capital.

As the world's largest economy, the United States is considered a good payer. Its particularly liquid market also means that investors can buy and sell bonds quickly and easily.

Furthermore, the rest of the world used to be interested in lending to the United States to have dollars and a safe investment.

However, since Trump imposed indiscriminate tariffs in early April, investors have tended to dump US debt and dollars, which are usually considered a safe haven on par with gold.

But while gold is currently trading at record highs, the dollar has depreciated by more than 10% in the first half of the year, its worst performance in that period since 1973.

Uncertainties are multiplying around the American economy, impacted by Trump's trade policy, geopolitical tensions in the Middle East and the monetary policy of the Federal Reserve ( Fed , the American central bank).

In this context, “investors are looking for safe havens, i.e. a currency and assets that protect them when volatility and uncertainty increase,” explains Imène Rahmouni-Rousseau, Director General of Market Operations at the European Central Bank (ECB).

“And precisely the euro and European public debt securities have taken on this role of protective shield,” he says.

“For the first time since the 2011 financial crisis, European financial markets are considered quite attractive by investors,” he celebrates.