Matt Griffin, a Trump supporter and Republican megadonor, founder of one of the largest hedge-funds in the world, warned a few days ago that global traders are concerned about their investments in the U.S., particularly in government bonds, as Trump’s tariffs have destroyed the faith that America will remain a reliable and rational player in global financial markets.
This is just one of many examples that government bonds and their markets have almost overnight become a frequent political and media topic. Before U.S. President Donald Trump initiated the tariff-trade war, the focus of public attention was usually on stock or currency markets. They are still given importance. However, government bond markets are increasingly being mentioned.
The Illusion of Sustainability
The reason? The story of government bonds is a story of the increasingly nervous growth of government borrowing around the world. Rising military defense costs or subsidizing industry and exports in the context of a trade war are just part of the increased financing needs from government treasuries. And these are filled by issuing government bonds. In this increasingly frantic competition, the winners will ultimately be the countries that can maintain the illusion of sustainability of their national debt among bond investors for the longest time.
We older ones learned back in the early nineties – from Professor Marijan Hanžeković’s book on securities – that stocks are equity securities, while bonds are debt securities. With stocks, everything seemed clear. With bonds, it was complicated to track what a coupon is, what a haircut is, and what basis points are. Then there’s the complicated story that as interest rates rise, bond prices fall, and as interest rates fall, they rise… Now that bonds are entering our lives in a big way, the lessons need to be repeated.
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The story of government bonds is a story of the increasingly nervous growth of government borrowing around the world. In this frantic competition, the winners will ultimately be the countries that can maintain the illusion of sustainability of their national debt among bond investors for the longest time.
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How important government bonds, their issuance, and refinancing are became evident when panic over what would happen with U.S. bonds forced Trump to pause his prohibitive tariffs for ninety days. Simultaneously, we from the European Union were warned that, what a surprise, the 750 billion that the European Commission borrowed as part of euro bonds for recovery and resilience during COVID-19 needs to start being repaid. The Croatian Employers’ Association (HUP) warned last week that in the upcoming period, due to the repayment of these debts, funding from EU funds, which we have become quite dependent on, could decrease by up to sixty percent.
Thanks to the ambitious Minister of Finance Marko Primorac, government bonds have become a topic for many small domestic investors who have been encouraged to enter the government bond market due to the negligible interest rates on savings in banks. Suddenly, it is hard to admit, the investment rating that Croatian public finances have received is no longer insignificant.
If we return to the global scene, the future of financing government spending through bonds and the costs at which this can be done will increasingly depend on the indebtedness of both large and small countries. And here, there is more and more evidence that all brakes are being released.
Global debt is reaching record levels. Major powers, which one wonders where they get so much money for armament, space exploration, investment in robotics, financing intelligence services, and a hundred other things, are setting records. The share of public debt in the GDP of the United States is 121 percent. China, which began borrowing decades later, is already at ninety percent.
Bonds More Dangerous than Stocks
Interestingly, Germany, which we Europeans angrily criticize for not waking up and ensuring peaceful financing for the rest of us in the EU in the future, has a public debt share in GDP of only 63 percent. The U.S., with its enormous debt, is failing to reduce poverty in the country. Germany has so far maintained what is called a welfare state with a smaller debt, with significant public expenditures for health care or pensions. And due to low indebtedness under new leadership, ready to remove conservative borrowing limits, it has much greater maneuvering space than, for example, the U.S.
The U.S. is, of course, far from the case of Argentina, which is an example of a country whose public finances are in disarray, which is why it actually has no possibility of financing through government bonds because no one will buy them due to excessive risk. But it is not trivial when, in the U.S. Congress, once a year, it is uncertain until the last moment whether federal services will receive their next paycheck or not. And in the end, another issuance of government bonds is approved.
Therefore, a piece of advice to all of us: let us pay attention to government bonds and their market. These signals dictate the moves of world leaders. More than signals from shops and from stock and currency exchanges.
