Global Financial Markets Face Potential Correction Amid Rising US Interest Rates and Debt

Global financial markets are facing increasing pressure that could lead to a significant correction before the end of the year, impacting markets worldwide, including Israel. A key factor is the rising yield on U.S. ten-year bonds, currently around 5%, a level not seen since October 2023 and reminiscent of the period before the 2008 financial crisis. The U.S. Treasury is attempting to lower long-term yields by issuing short-term bonds to buy longer-term ones, but this effort has not yet succeeded.

This situation is exacerbated by the U.S.'s growing budget deficits, partly due to the conflict with Iran, leading to annual interest payments on its debt exceeding $1 trillion. Historically, Japan played a crucial role in financing U.S. debt through its institutional investors, who bought U.S. bonds due to Japan's negative interest rate policy. However, Japan's new central bank governor has begun raising interest rates, making Japanese bonds more attractive. Consequently, Japan's holdings of U.S. debt have decreased, prompting U.S. Treasury Secretary Janet Yellen to urge Japan to continue purchasing American bonds, reminding them of the security alliance.

Many countries, including China, Poland, and Turkey, are increasing their physical gold reserves to hedge against U.S. dollar dependency, a trend known as de-dollarization. This shift away from U.S. debt is expected to intensify as Japan's fiscal year ends in March 2027, potentially leading to further increases in U.S. bond yields and exacerbating the looming financial crisis. Russia's freezing of U.S. bond assets following its invasion of Ukraine has also prompted other nations to seek alternatives to U.S. investments.

U.S. stock markets, particularly the tech sector heavily invested in artificial intelligence, have seen significant debt accumulation. Companies like Alphabet, Amazon, Meta, Microsoft, and Oracle have raised hundreds of billions of dollars in bonds. The high valuations of U.S. stocks, with price-to-earnings ratios significantly above historical averages, suggest a vulnerability to a market correction, especially if interest rates continue to rise. A potential market downturn is anticipated around mid-December, coinciding with the holiday season when many investors may reduce their exposure.

Analysts suggest that the Federal Reserve may further increase interest rates after the November midterm elections to combat inflation, potentially stabilizing the financial markets and even benefiting the stock market. However, the U.S. government may also implement budget cuts, which could negatively impact the stock market. The article also touches upon the concerns surrounding AI development, with some AI leaders warning of potential risks and the need for regulation, a topic that may be discussed between U.S. and Chinese leaders.