U.S. debt bomb would crash the dollar
United States published a record budget deficit in April, and the figures are quite impressive. Several traders have been wondering how the US dollar can remain so resilient in the face of this deficit and the growing debt burden it anticipates. The answer lies in analysing the cost of servicing the US debt burden, which has fallen significantly over the last two months, as the decline in US yield is accompanied by the debt accumulation we are seeing at the moment.
These last two words are important: the promised fiscal stimulus and the emission schedule indicated by the Treasury will lead to high public debt growth. Meanwhile, there is almost no room left for the yield to decline and there is a risk that at some point it will take off sharply. In this environment, we will quickly enter a new world where rising yields in the U.S. are an absolute negative for the dollar, not a central element of its support, as the cost of servicing the U.S. debt begins to rise and enters an uncontrolled self-fuelled spiral. But it is still a few months away from this time.