The explosion of U.S. debt is wiping out the 'safety premium' of Treasury bonds, IMF warns

Key Points:

• U.S. Treasury debt, traditionally viewed as a safe haven, is facing challenges due to a $2 trillion annual budget deficit and a $39 trillion national debt, with interest costs reaching $1 trillion annually, leading to increased issuance and higher yields.
• The IMF reports that the safety premium of U.S. Treasuries is eroding, compressing borrowing costs globally, as Treasury yields rise amid competition from record corporate debt issuance, particularly from AI sector giants.
• The "convenience yield" or safety and liquidity premium of Treasuries has recently turned negative, with investors showing stronger demand for sovereign, supranational, and agency debt like European Investment Bank bonds, which are yielding close to Treasuries.
• Demand for U.S. debt is shifting away from global central banks toward hedge funds, which now hold a record 8% of Treasuries, raising concerns about market volatility if leveraged positions are unwound.
• The IMF warns of an urgent need for the U.S. to stabilize its debt trajectory through fiscal reforms on both revenue and spending, as debt is projected to exceed 150% of GDP by 2055, narrowing the window for orderly fiscal adjustment.