The recent decision by Fitch Ratings to downgrade the U.S. debt rating has left the investment world grappling with its implications. However, what is truly striking is the staggering increase in the U.S. government’s debt that lies ahead – a staggering $5.2 billion each day for the next ten years.
Bank of America strategist Michael Hartnett sheds light on this alarming statistic, citing projections from the Congressional Budget Office. According to these figures, the public debt will surpass 118.9% of GDP by 2033, a significant jump from this year’s 98.2%.
In this context, Hartnett notes that central banks continue to bail out Wall Street, while governments remain committed to rescuing Main Street. Hartnett predicts that once the next recession triggers fiscal policy panic and an even higher risk of government defaults, G7 nations will resort to yield curve control as a policy measure.
It is worth mentioning that Japan, the only major economy implementing yield curve control, is slowly beginning to withdraw from it. The United States previously employed this policy during World War II and it has been revisited by Federal Reserve officials in recent times.
In the aftermath of the debt-ceiling resolution on May 31, commodities have emerged as the best-performing asset class, Hartnett highlights. While the absence of a recession is the primary driver, various supply-related factors have also contributed, including historically low U.S. oil inventories, India’s ban on rice exports, China’s restrictions on germanium and gallium exports, significant oil supply maneuvers by Russia and Saudi Arabia, and a military coup in uranium-rich Niger.
Hartnett’s analysis of Bank of America’s private clients reveals an ongoing shift to a risk-averse stance. Over the past two weeks, these clients have shown the largest inflows into bonds since October 2022 and have experienced the second consecutive week of equity outflows. Seeking safer options, they are investing in investment-grade debt, Japanese stocks, volatility products, while divesting from growth stocks, bank loans, financials, and technology-focused exchange-traded funds.