CFDs are complex financial instruments and carry a high level of risk due to leverage. A significant proportion of retail investors incur losses when trading leveraged products such as CFDs. You should carefully consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your capital.
If you’re wondering what public debt is, it’s the money a government borrows to finance spending that its revenue doesn’t cover. The government issues securities (treasury bills, bonds, notes) that investors purchase in exchange for interest and the return of principal at maturity. It is typically expressed as a percentage of GDP, which allows for comparing debt levels across countries.
When a government spends more than it collects in taxes, it runs a deficit. To cover that difference, it needs financing. The main way to do this is by issuing debt in the financial markets. Investors who buy these securities lend money to the government in exchange for a return.
The interest rate the country pays depends on the market’s confidence in its ability to repay. Countries with stable economies pay less interest. Countries with high debt or political instability pay more. The risk premium measures this difference.
Public debt is issued in three main maturity categories. Each has a different risk and return profile for the investor.
Treasury bills mature in less than one year. They are issued at a discount: you buy them below face value and receive the face value at maturity. The difference is your return.
Bonds (2 to 5 years) and government notes (10, 15, or 30 years) pay periodic coupons. The longer the term, the higher the yield, but also the greater the sensitivity to interest-rate changes. Ten-year bonds are the benchmark most closely followed by the markets.
If you’re looking for how to calculate public debt, the formula is straightforward.
Add up all outstanding debt. This includes treasury bills, bonds, and debentures that have been issued but have not yet matured.
Determine the country’s GDP—the total value of goods and services produced in a year.
Divide the debt by GDP. The result is expressed as a percentage.
Interpreting the ratio. A ratio of 60% is considered moderate. A ratio above 100% indicates that the country owes more than it produces in a year.
This ratio allows for comparisons between countries of different sizes. A debt of 3 trillion is manageable for a 5-trillion economy, but unsustainable for a 2-trillion economy.
An investor buys a 10-year government bond with a face value of 1,000 EUR and an annual coupon of 3%. The investor receives 30 EUR each year for ten years. At maturity, the investor recovers the 1,000 EUR. The total return is 300 EUR if the investor holds the bond until maturity. If they sell it earlier on the secondary market, the price may be higher or lower depending on how interest rates have changed.
Many beginners jump to conclusions when looking at debt figures.
Assuming that high debt means a country is bankrupt.
Failing to consider the country’s capacity for economic growth.
Ignoring who holds the debt (domestic vs. foreign).
Following the sovereign debt market offers specific advantages to traders.
Anticipating currency movements based on bond yields.
Assessing country risk before investing in assets from that economy.
Interpreting central bank decisions within a fiscal context.
Public debt measures how much a government owes its creditors. It is issued in securities with varying maturities and expressed as a percentage of GDP. For an investor, it is a key indicator of fiscal health that affects interest rates, risk premiums, and the value of the issuing country’s currency.