Global debt, China’s pessimism and Trump’s election odds

IMF flags rising debt levels as fiscal pressures mount

What the chart shows

This chart displays the debt-to-GDP ratio across various global economies, segmented into three sectors: general government, households and nonprofit institutions serving households (NPISHs), and non-financial corporations. Key groupings, such as the G20, Emerging Markets, and Advanced Economies are also highlighted to provide a broad perspective on global debt distribution.

Behind the data

In its October 2024 Fiscal Monitor, the IMF projects that global public debt will exceed $100 trillion by the end of the year, with the global debt-to-GDP ratio expected to approach 100% by 2030. Rapid debt accumulation is concentrated in major economies, including the US and China, but the pace and composition of debt vary significantly worldwide.

The IMF identifies several key risks to public debt: rising costs from technology innovation, climate adaptation, demographic pressures, political volatility, and optimism bias in economic projections. To address them, it has introduced a “debt-at-risk” framework to help policymakers assess various debt scenarios under adverse conditions.  

The analysis shows that, under current fiscal policies, most countries will be unable to stabilize their debt-to-GDP ratios without further adjustments. The IMF recommends gradual, people-centric fiscal adjustments to safeguard growth, warning that deep cuts to public investment could harm long-term economic stability. However, countries with strong fiscal institutions are better positioned to protect critical investments, even during crises.

Rising rates trigger historic losses on US investment securities

What the chart shows

This chart displays the unrealized gains and losses on US investment securities from 2006 to the present, focusing on two key categories: ‘available for sale’ and ‘held to maturity.’ It shows the value fluctuations in these securities for each year. The chart highlights the impact of recent interest rate hikes on banks’ balance sheets.

Behind the data

The recent historic surge in interest rates has had a notable impact on banks’ balance sheets, significantly reducing the market value of Treasuries and government-backed mortgage securities. As rates rise, the value of these securities falls, leading to substantial unrealized losses. Even though the Fed has started a rate-cutting cycle, these unrealized losses remain elevated, currently exceeding $500 billion. This is considerably higher than those observed during the Global Financial Crisis (GFC), highlighting the scale of recent rate increases and their prolonged effects on asset valuations.  

US yields defy expectations in latest Fed cutting cycle

What the chart shows

This chart shows the response of US 10-year Treasury yields to the first rate cut in each of the past seven Fed rate-cutting cycles. The initial cut in each cycle is marked as Day 0, with yield movements tracked over the following 50 days.  

Historically, yields have tended to decline within 50 days of a cut, reflecting market expectations of slower economic growth and further easing. In contrast, in the current cycle, the 10-year yield has climbed about 50 basis points in the 50 days since the Fed’s cut on 19 September.

Behind the data

Normally, Fed rate cuts signal slowing economic growth and lower inflation expectations, which often lead to lower long-term yields. However, this cycle has been different. Despite the recent cuts, the US economy remains strong, with consumer demand and the labor market showing resilience. This economic strength has tempered expectations for further easing, and as a result, yields have risen rather than fallen.  

At the same time, investors are worried about another bout of inflation amid political uncertainty ahead of the election – further driving yields upwards. The potential for impactful policy shifts could alter inflation expectations, and markets are closely watching how yields may respond after the 5 November election.  

Trump election odds and Treasury yields in lockstep as inflation fears grow

What the chart shows

This chart tracks two significant indicators related to the US macroeconomic and political outlook. The blue line reflects the 10-year US Treasury yield, while the green line represents the probability of a Trump election victory according to Polymarket odds. Both lines have demonstrated a strong correlation, generally moving in tandem over the past four months, with notable increases through September and October.    ‍

Behind the data

The simultaneous upward movement in both 10-year yields and Trump election odds reflects a convergence of economic and political factors, heightening investor anticipation of inflation pressures.  

The first is the Fed’s recent policy actions. In September, it cut rates by 50 basis points, signalling a significant shift in monetary policy despite a robust labor market and overall economic growth. This aggressive easing has fuelled fears that inflation could re-emerge. Investors have thus adjusted their expectations, leading to a rise in long-term yields as they demand higher returns to offset anticipated inflation.  

The second factor is the increasing likelihood of a second Trump presidency. Markets anticipate that his proposed policies—such as large tariffs, tax cuts and expansive deficit spending—could be inflationary. With Trump now favoured to win, yields are adjusting in line with his rising odds, reinforcing expectations of higher inflation if these policies materialize.

Pessimistic sentiment persists across China’s key economic sectors

What the chart shows

This chart shows the historical z-scores of China’s consumer, manufacturing, and real estate sentiment indices from 2000 to the present. A z-score represents the number of standard deviations a data point is from the mean, allowing us to see how sentiment levels deviate from long-term averages. A z-score near zero indicates sentiment close to historical norms, while extreme positive or negative scores indicate unusually high or low sentiment.

Behind the data

Despite recent monetary and fiscal stimulus packages, sentiment in China’s main economic sectors—consumer, manufacturing and real estate—remains pessimistic. Although consumer spending and manufacturing activity are expected to be primary growth drivers, sentiment indices suggest that confidence has not yet recovered. The real estate sector, facing significant structural challenges, shows particularly low confidence. Given all this, achieving the government’s 5% growth target for this year and in the coming years will be challenging. The data shows that while short-term boosts from stimulus measures may help, more structural reforms may be needed to address underlying weaknesses and restore long-term confidence.

Global equity returns show elevated risk amid macro uncertainty

What the chart shows

This scatter chart depicts the relationship between MSCI All Country World Index (ACWI) returns and global macro risk (using the Citi short-term global macro risk index) over the past ten years. It highlights their inverse correlation, depicted through a fitted linear trend line, alongside one and two standard error bands, which help illustrate the degree of deviation from the trend.

Behind the data

Although global stock indices have generally risen over the past decade, this chart underscores the persistent financial vulnerabilities associated with elevated debt levels and a growing disconnect between geopolitical tensions and financial market performance. By comparing global equity returns with global macro risk, we can see that MSCI ACWI returns over the past month are positioned between the +1 and +2 standard error bands, suggesting they may be moderately overvalued relative to historical trends. This positioning may indicate an increased level of risk relative to typical macro conditions. Increased vigilance in investment decisions may be needed because global equity markets may be pricing in a level of optimism that could be vulnerable to shifts in macro risk factors.

Argentina leads emerging market bond returns amid reform push

What the chart shows

This chart ranks the annualized gross performance of government bonds across 12  emerging markets, using the ICE BofAML fixed-income indices, which track USD-denominated bonds across all maturities. The highest-performing markets are ranked at the top for each year.

Behind the data

Argentina's bonds have recently surged to the top, reaching a critical psychological threshold for international investors with a remarkable 72% year-to-date return. Since taking office last December, President Javier Milei has implemented a series of reforms to curb government spending, narrow the fiscal deficit, and foster a more investor-friendly environment. These measures appear to have significantly boosted investor confidence, driving Argentina's bonds to new highs.  

Other emerging markets trail Argentina’s returns, led by Pakistan and Egypt. Pakistan’s bonds have demonstrated stable returns, maintaining a consistent position within the rankings. Egypt’s bonds have posted a sharp rise, delivering nearly 32% in returns this year – up from just 5% in 2023. This underscores a significant shift in emerging market performance, highlighting how fiscal and policy changes in specific economies can drive notable variations in bond market returns.