25 July 2023
Rising inflation is creating global financial stress, impacting both governments and businesses, including those in the U.S. With central banks raising key interest rates to combat inflation, the costs of borrowing, especially for inflation-linked debt, are surging. This represents a shift away from the era of cheap borrowing fuelled by low or even negative interest rates.
Governments worldwide, including the U.S., are facing hefty debt interests. Estimates suggest governments will pay around $2.2 trillion in overall debt interest this year. The U.S. Treasury’s interest cost alone grew 25% to $652 billion in the nine months through June.
In the bond market, yields on benchmark 10-year fixed-rate bonds, a proxy for government borrowing costs, have risen to 3.9% in the U.S., having been below 1% during the pandemic. This surge reflects the tightening financial conditions businesses also face. As existing fixed-rate bonds mature, they must be replaced with new, more expensive debt.
The U.K. has been particularly hard-hit due to the high proportion of inflation-linked debt, but such implications are relevant to economies worldwide, including the U.S. Companies are not immune to this pressure either. For instance, the U.K.’s Thames Water has been under financial strain due to its inflation-linked borrowings.
The situation underlines the importance of inflation management in the current global economic climate, given its far-reaching impact on financial stability for both public and private entities, in the U.S. and beyond.