U.S. government debt has been rising rapidly since the global financial crisis. Should that matter to Canadian investors? In a word: yes. Josh Nye, a fixed income strategist for RBC Wealth Management Canada, explains why.
Find more midyear market perspectives here, including a special report on U.S. debt from the Global Insight Midyear Outlook.
Read the full Global Insight Midyear Outlook.
Josh Nye:
It’s no surprise that US debt levels attract a lot of attention given the size of the US economy and the importance of the Treasury market globally. But why does it matter to Canadian investors? Here are three reasons you should care about US debt.
One: US debt can affect our borrowing costs
As the US government’s debt level rises, that can put upward pressure on bond yields. The Bank of Canada’s rule of thumb is that, for every percentage point increase in US yields, Canadian yields rise by about two-thirds. So, all else equal, larger US deficits will mean higher borrowing costs for Canadians.
Two: US debt can affect our currency
Canadian households and businesses are more highly indebted than their US counterparts. So, to prevent borrowing costs from rising too much, the Bank of Canada will likely have to keep its policy rate lower than in the US. That makes investing here less attractive, and it could put additional downward pressure on the Canadian dollar.
Three: US debt can affect our economy
While there’s no immediate pressure for the US government to reduce its deficits, the inflationary impact of fiscal spending could eventually force it to reverse course. That will weigh on the US economy, and Canada will feel the effects, given how connected we are. The longer the US puts off addressing its debt issue, the more painful the eventual adjustment could be.
So, there’s no question, Canadian investors have a stake in the US fiscal debate.
Find out more about US debt, and market conditions overall, in our RBC Wealth Management 2024 midyear outlook report.
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