Government interest costs will double in 2025

Global government debt has increased by 117% since the credit crunch. Thanks to the low rate of interest, this has been possible at a low cost. But those times are over. So Janos Henderson expects interest costs to double within 3 years. This is good news for bond investors.

The huge debt burden and rising interest rates will lead to an exponential growth in the interest costs of governments in the coming years. This is a setback for the economy and the taxpayer. It opens up new horizons for investors, Janus Henderson wrote in a press release.

The numbers the asset manager included in its annual sovereign debt index are alarming. Global government debt doubled between 2008 and 2022 (+117%) to a record $66.2 trillion. That was much faster than the global economy, which only rose 56%.

taxpayer

Over the past decade, these increases in debt have not been a catastrophe because of low interest rates, but as everyone knows, time is up for now. Governments should consider doubling interest costs in the next three years. Taxpayers will have to foot part of the bill.

Rising interest charges is an almost unstoppable process. Last year, it actually rose 20.9% (in constant currency) to a record $1.38 trillion. This was the largest increase since 1984. The effective interest rate on total debt (old and new) was 2.2%.

from 2.2% to 3.8%

Janus Henderson predicts that – as more and more old bonds are converted into new ones – this will rise to an effective yield of 3.8% by 2025, which means governments will have to pay $2.80 trillion in interest by then.

This is also due to the constant budget deficit which pushes the debt further and further. Janus Henderson projects global government debt of $77.2 trillion by 2025.

Someone has to pay the bill

The increase in government debt and interest costs cannot continue indefinitely without consequences. Governments will have to make adjustments in the form of spending cuts and/or higher taxes.

Janos Henderson believes that the United States is particularly vulnerable at this point. Last year, the United States took in more new loans than all other countries combined.

An additional pain point for the Treasury is losses on bonds held by central banks. These losses also burden the budget.

In general, lower government spending and higher taxes will hinder economic growth.

Ghost bond investors

The other side of the coin is that bond investors benefit from the situation. After all, they are the ones who collect the extra benefit. The yield on government bonds is now at its highest level since 2007. And that has caused a lot of pain in 2022. After all, higher interest rates drive prices lower. But Janos Henderson expects this process to reverse in the coming years.

In fact, the asset manager assumes a harder landing than many people think, which will lead to lower interest rates and higher prices.

Low debt in the Netherlands

The debt situation in the Netherlands is not so bad. We are among the best in class in terms of government debt with a debt ratio of just 51% ($536 billion) in 2022.

Debt is projected to reach $583 billion by 2025. This is higher than it was in 2022, but since the economy is growing faster than debt, the debt-to-GDP ratio is still down to 48%. Inflation also helps keep the debt mountain in check.