Brace for constant volatility as high interest rates amplify the US debt problem, BlackRock says

beijingwalker · Nov 21, 2023

Brace for constant volatility as high interest rates amplify the US debt problem, BlackRock says

Jennifer Sor
Tue, November 21, 2023 at 8:53 AM GMT+8

Scott Olson/Getty Images

Constant volatility will be a hallmark of the new market regime, BlackRock strategists said.
High interest rates will amplify the US's debt problem, which has already stoked volatility in markets.
Interest payments on US debt could soon surpass Medicare payments, strategists wrote.

The new market regime will be marked by constant volatility, BlackRock strategists wrote in a note, as higher-for-longer interest rates will exacerbate the issues with America's massive debt pile.

"We see volatility as a constant in the new regime," the world's largest asset manager said in a note on Monday, pointing to the rise in interest rates over the past year. Central bankers have hiked interest rates aggressively to control inflation, with fed funds rate now at its highest level since 2001.

And rates are likely to stay elevated, despite expectations from some investors for rate cuts on the horizon, the note warned. That's partly because the Fed's rapid interest rate hikes over the past year have pushed down US growth, meaning higher rates are now required to keep inflation in check.

"Markets appear to miss this bigger picture, and we see more volatility ahead as they swing between hopes for a 'soft landing' and fears about higher rates and recession," strategists warned.

Higher rates also spell trouble for the US debt picture, especially as the government's total debt balance edges closer to $34 trillion.

That rapid pace of spending has worried economists for years, but the debt could soon be reaching a breaking point, commentators warn, as higher interest rates have dramatically pushed up borrowing costs. The US's annualized interest expenses on its debt balance hit $1 trillion over the last quarter, according to a Bloomberg analysis.

And if interest rates stay close to 5%, the US could soon spend more on annual debt service than it spends funding Medicare in just a few years, BlackRock said.

Fears over the US debt picture have already stoked volatility in markets in recent weeks. The Cboe Volatility Index surpassed a closely watched threshold of 20 in October, partly due to debt fears pushing US bond yields higher. The yield on the 10-year US Treasury also briefly surpassed 5% last month, the highest level in 16 years.

BlackRock has warned previously of a tough regime ahead for markets, as the era of easy money and ample liquidity fades. Instead, strategists see inflation headed for a rollercoaster ride and warned last month that markets have yet to price in some of the damage to the macro picture.