Turning Japanese
You probably have heard the song. The important tag line is: “I really think so.” The song was referring to more of a cultural touchstone. I bend the meaning here to refer to national debt levels.
The Debt to GDP ratio for Japan is hovering around 251.7% of GDP. According to the Federal Reserve Bank of St. Louis, our Debt to GDP ratio as of Q 1 2026 attained the level of 122.6%. The level was temporarily higher during Covid. However, I wax nostalgic over a time when we were below the 100% ratio at time not long ago.
All the debt talk had me hearken back to earlier times when attempts were made to wrest control of the growth of the debt. I recalled the efforts made by the Simpson-Bowles Commission of 2010. Serious recommendations were put forth by the bipartisan commission that sadly were not approved by Congress. Shall I remind you that the debt ratio at the time was only 95.6%. The nominal amount of debt was $14.0 trillion. How quaint. The level now stands at $40 trillion. One may layer on a lot of debt when tax cuts and safety net spending are the order of the day. Certain reforms cannot come soon enough.
What is more pressing in the near term has become the servicing of the debt. Besides the safety net spending, the debt service line- item in the budget at over $1 trillion is one of the largest entries in the total budget. Higher rates would make the debt servicing level even higher.
Since higher rates on the long end would mean higher financing costs at the federal level and would potentially raise more concerns about liquidity, Treasury decided to step in on a short-term basis with a buy back program. The program is directed at the long end and is not that large and is in effect until November. The market had an initial positive reaction that quickly reversed. Some prominent critics also questioned the move as not addressing the greater challenge. It is true that Treasury is managing the debt of late with shorter tenors. That strategy could save some interest costs over time, but the primary consideration is just how high we will allow the debt to rise. There are increasing concerns about the demand for the paper and whether foreign buying will continue at historical levels. Top off the discussion with the large federal deficits that are ongoing and whether the dollar will weather the choppy waters going forward.
At this point, expectations are not high that anything of substance will be floated at Jackson Hole. We will probably just have to wait on the various commissions to report back.
Municipal Matters
Rates continue to be a focus but have not slowed issuance appreciably. Some large transactions are slotted to come to market, including California.
The Bond Buyer raised the important aspect of yield curve management. The challenge remains that large public projects need to finance long term with long term amortization. Issuing on a shorter-term basis is harder to accomplish without refinancing capabilities that are not restricted.
Some of our industry pundits have suggested that the municipal tax exemption may be back on the table when congress resumes its budgetary duties once again. It is early, but we should remain diligent.
Enjoy the end of summer.
John Hallacy
John Hallacy Consulting LLC
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