The United States COVID-19 vaccination rate advances at an incredible pace. Last Friday, almost three million adults in the country had received the jab, an ever-increasing pace.
The rate is so fast, that Ohio announced yesterday that it starts vaccination among the group of 40+-year-old ones. It tells much about the differences with the rest of the world if we do not account for Israel here.
It also shows what the potential for the American economy is in the period ahead. All those already vaccinated, plus the population that will receive the jab in the upcoming two months, will make all the adult population – a.k.a., the working class. Hence, the services sector, as well as the manufacturing one, are expected to boom, particularly the battled tourism industry.
Naturally, it all comes at a cost – a financial one. The U.S. federal budget deficit declined at a record pace in 2020 and 2021. After all, to finance the recovery, support the economy, and pay for vaccines, the country had to borrow money at unprecedented levels. While excessive borrowing is a worry in other parts of the world (e.g., Europe), in the United States, things differ. In sharp contrast, the country sees it more likely to win the race to “back to normal”, register higher economic growth, and pay the debt later.
U.S. Debt – An Attractive Investment or Not?
The problem with higher debt levels comes from making it attractive to investors. Why should an investor buy the U.S. bonds issued by the Treasury if the yields are not attractive? As such, the dilemma, or the challenge, more precisely, is for the Fed, and in particular, the Treasury, to find a balance between how high yields should go to make U.S. debt an attractive investment.
Investors should keep in mind that the Fed’s QE is running at a pace of about 5% of GDP in 2021. If we add to it the fiscal deficit of about 15%, there is a difference of 10% as a funding gap. More precisely, on the one hand, the Fed is buying 5%, but there is a need for another 10% to be bought by someone else – institutional investors, sovereign nations, etc.
Therefore, no matter what the secondary implications derived from higher yields are, the U.S. needs them higher, so to fund the gap. The big question is – how high is too high for the most wanted risk-free rate in the world?