Category Archives: Government Debt

US debt to GDP and household debt service ratio

A few days ago I made a post about European debt to GDP ratio’s and how they did not show any signs of excess. Hereby are the same charts but this time for the USA. The first chart is a long term chart which shows the debt to GDP ratio for US non-financial corporations, the US government and US households from 1975 till 2019. As can be seen households have been deleveraging since the start of the Financial Crisis in 2008 while corporations and the US government have been steadily getting more in to debt.

US debt to GDP ratios for US non-financial corporations, the US government and US households from 1975 till 2019
US debt to GDP ratios for US non-financial corporations, the US government and US households from 1975 till 2019

Thanks to low rates and the above mentioned deleveraging of households debt service ratios for US households are the lowest in 40 years.

US household debt service ratio (Debt payments as % of disposable personal income)
US household debt service ratio (Debt payments as % of disposable personal income)

Via Guide to the Markets – United States

Is the performance of Japanese bank stocks in a low interest rate environment an omen for European bank stocks?

Japan has been experiencing very low interest rates for more than 20 years now. The yield on 10 year Japanese bonds first dropped below 2% in 1997 and has since then steadily trended lower over the years. In 2016 these bonds first went in to negative territory, meaning that the interest rate dropped below 0%. Currently Japanese 10 year bonds have been at or below 0% for almost 4 years now.

Long term chart of 10 year Japanese government bonds
Long term chart of 10 year Japanese government bonds

The performance of Japanese bank stocks has been horrible over that same period to say the least. The index is at the lowest point in its existence.

Long term chart of Tokyo Stock Exchange (TOPIX) Banks Index
Long term chart of Tokyo Stock Exchange (TOPIX) Banks Index

The ECB has kept interest rates below 0% since 2014. In this period yields on most government bonds of Eurozone countries have steadily declined below zero. Countries like Germany and the Netherlands even have their whole yield curve below zero.

negative German yield curve
Chart showing negative German yield curve

So the question arises. Does the performance of Japanese banks show what future holds for the performance of European bank stocks? Lately, European banking stocks hit their lowest price in the last 30 years. Wiping out all gains made since the ’80’s.

STOXX Europe 600 Banks index (SX7E) long term chart
STOXX Europe 600 Banks index (SX7E) long term chart

Further reading: Bloomberg Opinion. Via Twitter

Eurozone debt to GDP and Eurozone debt service ratios

Here is a chart depicting the the debt to GDP ratios for non-financial corporations, governments and households in the Eurozone from 2000 till 2019. The chart shows how Eurozone households have been deleveraging since 2010. European governments and corporations have started deleveraging more recent in 2015.

Eurozone debt to GDP ratios for non-financial corporations, governments and households
Eurozone debt to GDP ratios

Here is another chart showing Eurozone debt service ratios for households and non-financial corporations from 2000 till 2019. These are a GDP-weighted average of France, Germany, Italy and Spain. Helped by low rates these ratios are now as low as in 2000. No sign of excess as in 2008.

Eurozone debt service ratios for households and non-financial corporations
Eurozone GDP-weighted debt service ratios for France, Germany, Italy and Spain

Via Guide to the Markets – Europe

Dutch Government debt payments to GDP from 1950 till 2020 / Rentelasten Nederlandse Staatsschuld van 1950 tot 2020

A chart of the debt payments as a percentage of GDP of the government of the Netherlands from 1950 till 2020.

Een grafiek van de rentelasten als een percentage van het bruto binnenlands product (BBP) die de Nederlandse overheid betaald op de staatsschuld van 1950 tot 2020. Via Twitter

grafiek Rentelasten Nederlandse Staatsschuld 1950 - 2020 als een percentage van het bruto binnenlands product (BBP) bron CPB. Chart Netherlands Dutch Government debt payments to GDP (Gross Domestic Product)

Where Will Interest Rates Go In The Next Few Years?

I love long term charts. I think they are a great refreshment from all the short term thinking that is going on in the financial world on a daily basis. Those long term charts really show you some perspective.

Most of the time that we are shown the US 30 year treasury bond yield’s people will come up with this chart:

30 year us treasury bond yield st louis fed

Judging from this chart rates are exceptionaly low now. Some would say that bonds at these level are a bubble and that they will have to crash soon.

But then there also is this chart.

This is a long term chart, covering 222 years, of the interest rate on US 30 year treasury’s: (Source Ritholtz)

ritholtz long term us treasy bond yields 30 year 222 years

Here is one for the treasury’s for the Dutch State. Again a very long term chart. (Source in Dutch)

lange termijn rente nederlandse staats obligaties bonds 500 jaar

These charts really shows how exceptionally a 30 year bond yield of 6% actually is. Most of the time in the last 100 years bond yields were under 5%.

Will interest rates really shoot up to 6% maybe 7% soon? That’s an event that is highly unlikely in the low-growth, paying-down-debt environment we are in now. People are not spending and borrowing enough. Rates will go up when inflation(-expectations) go up or when there is fear amongst investors that a government will not pay down its debt.

Examples of this can be found in the 70’s when inflation was really high and bond yields went up to keep up with that inflation. Nowadays inflation is very low.

long term inflation dshort cpi

The only countries that pay a high yield on their bonds right now are countries of whom investors are afraid that they may default (partially) on their debt in the future. The higher yield is simply a risk premium.

My take is that interest rates will remain low the coming years. Probably stay between 2% and 4% on the 30 year bond.

I’ll leave you with Japan’s bond yield. Which has been below 2% for more than 15 years. I talked about Japan´s Huge Debt in another post found here. In Japan there has been almost no inflation the last two decades and there hasn’t been any fear that the government can’t pay down its debt. So far.

japan government bond yield long term