Markets “vulnerable to a pullback”, US economy entering “debt hole”

Markets were mixed on Monday.

The S&P 500 was flat, the STOXX Europe 600 fell 0.3 percent and the Nikkei 225 rose 0.6 percent.

The US 10-year Treasury yield rose 8 basis points to 1.632 percent, its highest since 13 August.

Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research, noted that “the fact that we’re this close to an all time high puts us in a dangerous situation and makes the market vulnerable to a pullback”.

Federal Reserve data released on Monday showed consumer borrowing in the US rose at the fastest rate in almost two years in July.

However, this comes at a time when total potential debt for the US is already running at 1,832 percent of GDP, based on calculations by AB Bernstein.

The debt measure included not only traditional levels of public debt like bonds but also financial debt as well as future obligations for so-called entitlement programs, some of which are not set in stone.

“While the picture is dire, such numbers don’t prove we are doomed or that a debt crisis is inevitable,” said Philipp Carlsson-Szlezak, chief US economist at AB Bernstein, in his report.

Still, many are worried about today's debt levels.

“We are quickly approaching a situation where we have dug ourselves a debt hole which is doing to have profoundly negative effects on the economy for probably decades going forward,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

“In the next credit cycle downturn, then, the generally lower credit quality of today’s speculative-grade population means that the default count could exceed the Great Recession peak of 14% of all rated issuers,” said Christina Padgett, a Moody’s senior vice president.