CNN Business/Julia Horowitz
The world went on a debt binge last year. There could be a nasty hangover

Desperate to save their economies from complete collapse, governments borrowed unprecedented amounts of money on the cheap to support workers and businesses during the pandemic. Now, with recovery in sight, a big risk looms: interest payments.

Spurred on by rock-bottom rates, governments issued $16.3 trillion in debt in 2020, and they’re expected to borrow another $12.6 trillion this year, according to S&P Global Ratings. But fears are growing that an explosive economic comeback starting this summer could generate inflation, potentially forcing central banks to raise rates sooner than expected.

Should that happen, the cost of servicing mountains of sovereign debt will jump, eating up government funds that could otherwise be spent on essential services or rebuilding weakened economies. US lawmakers approved a mammoth $1.9 trillion stimulus package on Wednesday that could send prices higher and increase pressure on the Federal Reserve.

Many economists think the threat of inflation may be overplayed. But political leaders, worried they’ll need to make difficult tradeoffs in the years ahead, are watching the situation closely.

“Borrowing costs are affordable right now, but interest rates and inflation may not stay low forever,” UK finance minister Rishi Sunak warned when announcing the British government’s budget earlier this month.

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Fox Business/Associated Press
US budget deficit hits record $1.05 trillion after 5 months

The U.S. government’s budget deficit through February hit an all-time high of $l.05 trillion for the first five months of this budget year, as spending to deal with the coronavirus pandemic surged at a pace far above an increase in tax revenue.

The Treasury Department reported Wednesday that the October through February deficit was 68% larger than the $624.5 billion deficit recorded during the same period last year.

It easily surpassed the previous five-month deficit of $652 billion set in 2010 when the government was spending to try to lift the country out of the deep recession caused by the 2008 financial crisis.

The Congressional Budget Office has projected that the deficit for the budget year that ends on Sept. 30 will be $2.3 trillion. However, that estimate does not include the cost of President Joe Biden’s $1.9 trillion COVID relief measure, which cleared Congress on Wednesday.

Last year’s deficit, also driven higher by virus relief packages, was a record $3.1 trillion.

Nancy Vanden Houten, senior economist at Oxford Economics, said she estimated the latest relief measure will drive this year’s deficit up to $3.4 trillion.

The deficit for the month of February was $310.9 billion, up from $236.3 billion in February 2020, the month before the pandemic hit with force, shutting down businesses and triggering millions of job losses.

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CNN Business/Matt Egan
Suspense builds on Wall Street over expiring Covid relief for big banks

With the economy crashing and markets in chaos last spring, the Federal Reserve handed out get out of jail free cards to America’s big banks. Now that the recovery is gaining steam, the Fed has to decide if it’s time to enforce the rules once again.

Suspense is building on Wall Street over whether the Fed will extend an exemption that loosened leverage rules applying to JPMorgan Chase, Bank of America (BAC)and other large lenders.

The waiver, aimed at stabilizing markets and boosting lending, meant big banks wouldn’t be penalized for bulking up on ultra-safe US Treasuries and taking in a surge of deposits.

But leading Democrats including Senator Elizabeth Warren want the Fed to let the exemption lapse as scheduled at the end of March. They fear big banks are using the pandemic as an excuse to weaken the post-2008 crisis rules.

In sharp contrast, JPMorgan and Citigroup have called for the Fed to consider making the waiver permanent. And some analysts warn a failure to extend will backfire by forcing banks to retreat from the US Treasury market at a time when their huge balance sheets are needed to ease turmoil in that market.

“The Fed should be concerned about a taper tantrum 2.0,” KBW analyst Brian Kleinhanzl wrote in a note to clients this week.

The first “tantrum” he’s alluding to happened in 2013, when Treasury yields spiked after the Fed signaled it would slow bond purchases, causing Wall Street to panic. “The potential impact of not renewing the exemption could be large.”

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Kitco/Neils Christensen
The gold market and miners still look good as bond yields can’t rise forever – Wood Mackenzie

The gold market is struggling to find consistent bullish momentum as prices hold above $1,700 an ounce. However, one research firm said that investors should be a little more patient as the precious metal still can surprise the upside.

The gold market has struggled early in 2021 as bond yields have spiked to a one-year high. However, Rory Townsend, head of gold research at Wood Mackenzie, said in a telephone interview with Kitco News on the sidelines of the Prospectors & Developers Association of Canada (PDAC) virtual mining conference that he sees the rise in bond yields as a bit of a head fake and that gold prices should recover.

“Gold has come down quite a bit from its August highs and we think this selloff is a little overdone,” he said. “We just don’t think bond yields will rise indefinitely. We expect to see a resurgence in gold in the second half of the year as inflation picks up.”

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