• In 2021, US government borrowed an extra $3,434 on behalf of each citizen
• US government debt is now a third larger than its pre-pandemic level, compared to an increase of just over one fifth for the rest of the world
• Amid the growing US debt burden, the US economy performed very strongly, expanding 9.0% in 2021, significantly faster than the rise in borrowing for the year (6%)

As the second year of the pandemic passed, US government debt increased 6% in 2021 to $22.3 trillion according to the second annual Janus Henderson Sovereign Debt Index. The growth in US debt is poised to continue as the cost of servicing this borrowing is expected to reach record levels in 2023.

Globally, sovereign debt is expected to rise by 9.5% in 2022, up by $6.2 trillion to a record $71.6 trillion. The increase will be driven by the US, Japan and China in particular, though almost every country is likely to borrow further.

2021 saw sovereign debt levels hit new records

Every country Janus Henderson examined saw borrowing rise in 2021. China’s debts rose fastest and by the most in cash terms, up by a fifth, or $650 billion. Among large, developed economies, Germany saw the biggest increase in percentage terms, with borrowing rising by one seventh (+14.7%), almost twice the pace of the global average.

Despite surging levels of borrowing, debt servicing costs remained low. Last year, the effective interest rate on all the world’s government debt was just 1.6%, down from 1.8% in 2020. This brought the total cost of servicing the debt down to $1.01 trillion, compared to $1.07 trillion in 2020. The strong global economic recovery meant the global debt / GDP ratio improved to 80.7% in 2021 from 87.5% in 2020 as the rebound in economic activity outpaced the increase in borrowing.

2022 will see debt servicing costs significantly increase

The global interest burden is set to rise by around one seventh on a constant-currency basis (14.5%) to $1,160bn in 2022. The biggest impact is set to be felt in the UK thanks to a rising interest rates, the impact of higher inflation on the large amount of UK index-linked debt, and the cost of unwinding the QE programme. As interest rates rise, there is a significant fiscal cost associated with unwinding QE. Central banks will crystallize losses on their bond holdings which have to be paid for by taxpayers.

Bond market opportunities for investors

Janus Henderson sees asset allocation opportunities in shorter-dated bonds as they are less susceptible to changing market conditions. Janus Henderson believes markets are expecting more interest rate hikes than are likely to materialize and this means shorter-dated bonds will benefit if the tightening cycle ends sooner.

Jason England, portfolio manager, global bonds at Janus Henderson said: “Bond markets around the world converged at the onset of the pandemic as governments and central banks provided significant levels of support to their economies in the face of unprecedented uncertainty. However, as we move past two-year lockdown anniversaries, a divergence is occurring. In the US, UK, Europe, Canada and Australia, focus has shifted toward how to rein in inflation through higher interest rates and steps towards unwinding quantitative easing. At the same time, the Chinese central bank is doing the opposite – stimulating the economy with looser policy.

This divergence is a cue for more volatile markets and timely opportunities for selective fixed income investors.”

The Janus Henderson Sovereign Debt Index tracks the borrowing of governments around the world and identifies the investment opportunities this presents.

Notes to editors

Janus Henderson Group is a leading global active asset manager dedicated to helping investors achieve long-term financial goals through a broad range of investment solutions, including equities, fixed income, quantitative equities, multi-asset and alternative asset class strategies.

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