Market snapshot: US seeks calm with bond buybacks as national debt hits $40tn

US Treasury Secretary Scott Bessent at the White House last month. Photo: Mandel NGAN/AFP via Getty Images.

US markets stumbled, with the optimism of a stellar earnings season increasingly being eclipsed by concerns of higher borrowing costs.

Earlier this week, the Treasury announced that it would be at least doubling its repurchases of 10, 20 and 30-year debt over the coming months, which initially drove government bond yields lower. However, as the dust settled the desired lowering of yields after the announcement proved to be short-lived and these have now all but returned to their previous levels. 

This could signal a number of things, most importantly perhaps that the bond market cannot be controlled and, in any event, that its main concerns lie elsewhere. The US national debt has now passed the $40 trillion (£29 trillion) level for the first time, equivalent to more than 6% of GDP and the interest payments alone on this borrowing are running at an estimated $1.2 trillion, roughly on a par with the entire defence budget. As such, the Treasury move is being seen as a small plaster for a much larger wound.

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At the same time, higher yields are a signal that investors demand to be paid more for an increasingly worrying level of government debt, with an additional complication coming from the largest technology firms who are competing for that cash as they continue to invest hundreds of billions of dollars on the AI buildout. As such, the equally generous yields coming from high-grade corporate debt is increasingly becoming more of an attraction for investors.

Of course, the elevated oil price adds another layer of inflationary complexity amid the Middle East conflict, for which no resolution appears to be in sight. Apart from the second-round effects on the consumer wallet, where higher energy prices may mean sacrifices to other parts of the personal budget, there are also implications from a shortage of refinery output. Diesel, for example, used by any number of industrials ranging from construction and mining to farming and transport, is also suffering from higher prices, while there are also increasing inflation concerns around food prices given what could be a large impact from El Nino.

These factors have combined to take the shine from what has been the main driver of equity markets of late, namely a truly outstanding set of corporate earnings over the latest quarter which, if nothing else, have served to justify the loftier valuations which have resulted. A fly in the ointment arrived yesterday as retail giant Walmart Inc (NASDAQ:WMT) missed analyst expectations, sending its shares more than 9% lower, and posing further questions on the strength of the consumer at present.

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For all the concerns, the main indices are still in strongly positive territory given the momentum which corporate earnings have provided over recent months. In the year to date, the Dow Jones is ahead by 9.8%, the S&P 500 by 11.6% and the Nasdaq by 12.2%, albeit slightly shy of the recently recorded highs.

For the UK, weaker retail sales in July after a fall in footwear and clothing were slightly worse than expected, although on a three-month rather than one-month view the trajectory remains positive. Meanwhile, there were further concerns on the level of government borrowing. Higher borrowing costs are a global phenomenon, certainly not just contained within the US, and as such the repayment of such debt interest becomes increasingly onerous and something of a political headache.

The FTSE 100 hugged the flatline once more as it has done for most of this week in the absence of any true positive catalysts. The mining sector was again the saviour which prevented a wider decline, with rising commodity prices underpinning names such as Antofagasta (LSE:ANTO) and Fresnillo (LSE:FRES), given their particular exposure to copper and gold respectively. 

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A bounce of over 2% in JD Sports Fashion (LSE:JD.) did little to reverse their sharp decline after a disappointing update yesterday, and the general investor mood remained sombre. Nonetheless the marginal tick higher leaves the FTSE 100 ahead by 8.3% so far this year, while the FTSE 250 was also cautiously positive bringing its gains to 9.3% over the period.