US Interest Payments: The quietly growing elephant in the room?

The U.S Government’s Net Interest payments have officially exceeded their National Defense spending making it the 3rd largest source of spending. This is significant because the US is known for spending more on its defense than the next 9 countries combined!

It is estimated that the amount of Net interest payments will likely exceed $1 Trillion mark by the end of 2024.

To put it in perspective, their total spending for Net Interest for FY 2022 was $475 Billion and it was the 7th largest spending source back then. So, when it crosses $1 Trillion mark, that’s a figure that has more than doubled within a span of 2 years.

Sure, the rising interest rates have contributed to this but so has their rising national debt. It’s almost a vicious cycle. As the national debt increases, the government issues more debt to finance the deficit. Each new issuance brings with it interest obligations, which increase the total amount that the government must pay in interest. The average GDP for fiscal year 2023 was $26.97 T, which was less than the U.S. debt of $33.17 T. This resulted in a Debt to GDP Ratio of 123 percent.

What implications does this hold? The rising cost of servicing debt is squeezing federal spending capabilities, impacting everything from infrastructure to education. If more credit rating agencies see this data and think it is unsustainable, it is possible that we may witness more rating downgrades on the US. Last year in August 2023, Fitch ratings lowered the US from the highest AAA classification to the notch lower AA+. In November 2023, Moody’s maintained their AAA classification but changed their outlook to “Negative”.

This situation is probably adding pressure on the Federal Reserve to speed up on the rate cuts.

Investors with exposure to U.S. assets should carefully monitor fiscal and monetary policy developments, the health of the U.S. economy, and market reactions to shifts in the U.S.'s financial condition. Diversification and strategic asset allocation become even more crucial in such uncertain environments to manage risk effectively.

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