The US national debt has reached a staggering $39 trillion. Many economists believe this enormous debt could be devastating to the entire nation at any moment due to a sudden shock. Recently, the Federal Reserve has become a major point of contention in this matter.



The logic behind this is not difficult to understand. On June 17, the Federal Reserve maintained interest rates as expected, keeping the range between 3.5% and 3.75%, but signaled a possible rate hike later this year. This was in stark contrast to market expectations a few months earlier, when the market had widely anticipated a rate cut. Newly appointed Federal Reserve Chairman Kevin Warsh, in his first policy meeting after taking office, clearly stated that he would do everything possible to stabilize prices, and the Federal Reserve also pledged in its statement: "The Federal Open Market Committee will remain committed to its policy objective of price stability."

In the initial days following the meeting, market traders picked up on this tightening signal and began anticipating higher interest rates. Concerns that rising borrowing costs would constrain the expansion of the debt-driven artificial intelligence industry caused US stocks to fall by 0.5% to 1% that day.

The bond market's performance further illustrates the issue: short-term US Treasury yields rose, but the yield on 10-year Treasury bonds, which truly determines the overall cost of US debt financing, remained largely unchanged and subsequently declined slightly. What's puzzling is why long-term yields haven't risen given the high level of US debt. Currently, the US government's annual interest payments on its national debt exceed $1 trillion, far exceeding military spending, healthcare, and other rapidly growing fiscal expenditures. However, the Federal Reserve's tightening of monetary policy does not significantly impact this enormous interest expense.

U.S. Treasury bonds are not fixed-rate long-term loans; their structure is highly complex. The government needs to continuously issue new debt to repay maturing old debt, and the interest rate on newly issued bonds is entirely determined by market conditions on that day. A Federal Reserve rate hike will only increase the financing costs of short-term, low-interest loans. Eric Vinogradil, chief U.S. economist at AllianceBernstein and a former employee of the Federal Reserve Bank of New York, told Fortune magazine, "The impact is limited to ultra-short-term bonds. Even if the Fed starts raising rates, a slight increase in short-term interest rates over a year will not change the fundamental situation of overall debt interest rates."

What truly impacts the long-term risks of US debt are the government-set interest rates on 10-year and 30-year Treasury bonds. These long-term rates are currently declining, primarily due to falling international oil prices and a gradual cooling of domestic inflation. US Treasury bond auctions consistently attract ample market participation. The credit hedging trend of "selling US Treasuries and increasing gold holdings," which was widely discussed in the media this winter, is, in Vinograd's view, mostly hype with very little actual market activity.

However, beneath the seemingly stable debt market lie two major risk warning signals.

First, investors are quietly raising their risk pricing for long-term U.S. Treasury bonds. A report released by David Doyle, chief economist at investment bank Macquarie Group, points out that the risk premium currently charged by the market for long-term U.S. debt has reached its highest level in over a decade, reflecting widespread investor anxiety.
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The second issue is the continuously expanding fiscal deficit. Currently, the US employment situation is good and the overall economy is robust, but the government's annual debt still accounts for 6% of the national economy, a situation extremely rare in history. Previously, the US only experienced such large-scale government borrowing during economic recessions.

Moreover, official debt forecasts are overly optimistic. Currently, the average interest rate on US Treasury bonds is approximately 3.35%, and fiscal forecasting agencies predict this rate will eventually rise to only 3.9%. However, Macquarie Group warns that if the average interest rate on Treasury bonds climbs to 5% or even 6%, US debt interest payments will surge, and the fiscal deficit as a percentage of the total economy could exceed 10%, creating a vicious cycle: increased debt pushes up the fiscal deficit, and the widening deficit forces the government to borrow even more.

Eric Noland, chief economist at the Chicago Mercantile Exchange, offered a more serious perspective. In his research report, he stated that the current stable long-term Treasury yields are influenced by artificial manipulation. On the one hand, the US government has increased the issuance of short-term Treasury bonds while reducing the issuance of long-term bonds; on the other hand, the Federal Reserve has slowed the pace of reducing its own bond holdings. These two operations have artificially suppressed long-term Treasury yields. Overseas markets provide the best evidence: countries like Japan, the UK, and France, also facing fiscal difficulties, have seen their long-term Treasury yields surge due to a lack of policy buffers.

Despite numerous potential risks, the United States has not yet experienced a debt crisis. Vinograd stated that there is no fixed debt level that would trigger a debt collapse. "As long as investors continue to buy US Treasury bonds, the US debt system can function, and the market currently has ample liquidity," he added. He further stated that even if problems arise in the debt system in the future, the root cause will not be economic, but rather policy decisions from major overseas creditors such as central banks in Asian countries.

Regarding the Fed's strong signal of a rate hike, Vinograd believes there's no need to overinterpret it. "Don't overemphasize this hawkish statement," he said. "This is just Warsh's first policy meeting since becoming Fed Chairman."