Transcription
The US Treasury bond market has fallen by almost 50% since 2020, marking one of the worst 5-year performances in its entire history, and it's now among the worst performing financial assets of this cycle. Yet, despite that collapse, investors aren't stepping in to buy the asset at a discount. They're doubling down.
Short interest in TLT, the most popular long-term Treasury ETF, has just hit an all-time high. That means the market is positioning for an even deeper downside. And the primary driver of this bearish sentiment is the sheer volume of new debt supply. Since 2020, the US has issued over $15 trillion in new debt, an amount normally added over decades, not just a few years.
Now, rapid debt growth isn't automatically bad. For a long time, it made sense. They used it to fund economic growth like we saw from the 1970s through 2010. The US GDP consistently outpaced the rise in government debt. But that dynamic changed around 2012. Debt began creeping above GDP growth and after 2020, these two lines have diverged away completely. Debt jumped $15 trillion while the economy expanded by only $9 trillion. So instead of borrowing to fuel growth, the US is accumulating debt faster than its economy can keep up. That's the part that worries bond investors.
And the trend still isn't pointing in the right direction. For almost 25 years, the US has run persistent budget deficits, meaning it spent more than it earns. And looking ahead, those deficits are projected to get even larger. That means only one thing. The government has to issue even more debt to fund it.
But as the debt load grows and treasury prices fall, investors demand higher yields. And higher yields are painful for the government because they drive up interest costs. This year, the government spends over $1 trillion per year just on interest on its debt, which has grown rapidly since 2020. That's roughly 20% of federal revenue. Meaning 1/5th of all tax dollars collected aren't being used for infrastructure, health care, defense, or economic growth. They're being used simply to pay interest on past borrowing. It's like a self-reinforcing cycle. Higher deficits lead to more borrowing. More borrowing pushes yields up. Higher yields push interest costs higher. And higher interest costs require even more borrowing.