Ohm Srinivasan and Kyle Leavitt
August 27, 2019
The chart below provides a more useful context—global debt as a percentage of global gross domestic product (GDP). This graphic is quite telling in that global debt has not materially outpaced global economic growth, limiting reason for concern to the shock-inducing “hundreds of trillions of dollars of debt” often quoted.
Total Global Debt as a Percentage of Global GDP
While global debt to GDP has only increased marginally, there have been material shifts in the underlying borrowers. Typically, the borrowers are broken out by governments, financial firms, non-financial corporations and households. It is worth taking a closer look at the portion borrowed by governments, also known as sovereign debt.
According to the chart below, sovereign debt was 62% of global GDP in December 2008. Ten years later, that number has grown to 86%—a 39% increase in the level of global sovereign debt to GDP, compared to only a 9% increase in aggregate global debt to GDP.
Total Sovereign Debt as a Percentage of Global GDP
The growth in sovereign debt over the last ten years began as a fiscal response to stimulate the economy out of the 2008 global recession. In the U.S., the government deficit grew to -10% of GDP ten years ago. It remains around -4% of GDP and growing again, as seen in the chart below.
U.S. Government Surplus/Deficit as a Percentage of Global GDP
As deflation became a major concern between 2007 and 2009, central bankers around the world introduced quantitative easing (QE) and extraordinarily low—even negative—interest rates. While global sovereign debt levels may have grown, the cost of borrowing, as seen in the chart below, has reached new lows.
Global Average Interest Rate on 10-Year Government Bonds
Given the current low cost to borrow, governments in developed economies are unlikely to default on their sovereign debt any time soon. However, in the long run, high levels of debt have the potential to become problematic. If inflation returns, a negative feedback loop could be triggered. Interest rates would rise, leading to higher borrowing costs and slower economic growth, ultimately increasing the debt burden. If this trend also triggers currency depreciation, then potential runaway inflation could exacerbate the problem further.
For the time being, inflation seems to be nowhere in sight, considering most major economies are still battling disinflation. Emerging economies can be less stable at times, especially if large amounts of foreign-currency-denominated debt were issued and currency depreciation starts to accelerate. However, this practice does not seem problematic, since recent debt issuance has mostly been local-currency denominated and/or domestically owned. There are always a few exceptions, such as Argentina and Venezuela, which we consider immaterial on a global scale due to their relatively small economies.
The major near-term risk of investing in sovereign bonds today may not actually be default, but rather the lack of yield. As of August 15, 2019, approximately $17 trillion of outstanding sovereign bonds provided negative yields (according to Bloomberg). The remaining sovereign bond yields have also dropped to levels so low they have been nicknamed “return-free risk.”
While we do not see signs of a global sovereign debt crisis any time soon, the bond market has created a near-crisis for investors seeking yield.
CIBC Private Wealth Management includes CIBC National Trust Company (a limited-purpose national trust company), CIBC Delaware Trust Company (a Delaware limited-purpose trust company), CIBC Private Wealth Advisors, Inc. (a registered investment adviser)—all of which are wholly owned subsidiaries of CIBC Private Wealth Group, LLC—and the private wealth division of CIBC Bank USA. All of these entities are wholly owned subsidiaries of Canadian Imperial Bank of Commerce.
This document is intended for informational purposes only, and the material presented should not be construed as an offer or recommendation to buy or sell any security. Concepts expressed are current as of the date of this document only and may change without notice. Such concepts are the opinions of our investment professionals, many of whom are Chartered Financial Analyst® (CFA®) charterholders or CERTIFIED FINANCIAL PLANNER™ professionals. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S.
There is no guarantee that these views will come to pass. Past performance does not guarantee future comparable results. The tax information contained herein is general and for informational purposes only. CIBC Private Wealth Management does not provide legal or tax advice, and the information contained herein should only be used in consultation with your legal, accounting and tax advisers. To the extent that information contained herein is derived from third-party sources, although we believe the sources to be reliable, we cannot guarantee their accuracy. The CIBC logo is a registered trademark of CIBC, used under license. Approved 4162-19.
Investment Products Offered are Not FDIC-Insured, May Lose Value and are Not Bank Guaranteed.
John Tennaro, CIMA®
May 24, 2017
October 30, 2018
February 05, 2019
* Required fields
Internal Custody:If your assets are custodied with Atlantic Trust, please select the internal custody version of Atlantic Trust Portfolio Online to view your portfolio information.
External Custody:If your assets are custodied with an external custodian, such as Schwab, Fidelity or The Bank of New York, you may access the external version of Atlantic Trust Portfolio Online.
Sponsored Funds Investors:If you are an investor in any of the Atlantic Trust Sponsored Funds, you may access the Atlantic Trust Investor Dashboard here.
Safari Browser Users:To access login links, you will need to deselect the "Block pop-up windows" option under your security preferences.
For further assistance, please contact your Atlantic Trust client service team.