Is America at risk of a bond market meltdown? This watchdog thinks so

The United States faces the risk of a bond market crisis similar to what the United Kingdom experienced 18 months ago, warns Congress’s independent fiscal watchdog. The Congressional Budget Office (CBO) expresses concern over the record-breaking US government debt, which has raised worries about the burden on the economy and credit rating. The CBO director highlights the danger of market reaction to policymakers’ actions, citing the UK’s experience and former Prime Minister Truss’s resignation due to investor backlash against unfunded tax cut plans. While the US is not at that point yet, increasing interest rates could lead to a bond market backlash. The UK’s bond market turmoil in September 2022 provides a cautionary example of investor rejection of a government’s borrowing plans, leading to a sell-off in gilts and the pound. The Bank of England stepped in to stabilize the situation. The US government has also seen a significant rise in debt from tax cuts and pandemic stimulus. Fitch downgraded the US credit rating in August, citing a high and growing debt burden. The US government’s increasing interest payments on the debt are diverting funds from public services. The CBO predicts that the US government debt will continue to rise, posing risks to the fiscal and economic outlook. Large and growing debt could slow economic growth, increase interest payments to foreign debt holders, and limit policymakers’ choices.