As part of our «Investment Summit» roadshow at the beginning of 2025, we pointed out a risk for capital markets that both the stock market and politicians were not yet paying the necessary attention to at the time: the escalating debt of the USA.
Today, the topic has gained more prominence in reporting, but has by no means lost its relevance. To put this in context: since the 1960s, the US national debt, in absolute figures and irrespective of the governing party and presidency, has only moved in one direction: steeply upwards. It currently stands at 37 trillion US dollars. In relation to economic output, the debt amounts to around 123 percent, which even exceeds the high point after the Second World War. Only during the coronavirus crisis was the percentage burden even higher. The problem now is that, after years of record-low interest rates, average refinancing costs are rising continuously. Interest payments already reached USD 0.9 trillion in 2024, which is roughly equivalent to the US military budget – and the trend is rising. This also coincides with a high budget deficit, which currently corresponds to around six percent of economic output.
Anyone hoping for consistent countermeasures to reduce debt through the newly formed Department of Government Efficiency (DOGE) and the recently passed budget laws was disappointed. While economists debate whether the “Big Beautiful Bill Act” will increase the deficit by extending tax breaks or not, whether additional revenue from trade tariffs will provide some relief or not, facts have been created elsewhere: Congress has raised the debt ceiling by another five trillion US dollars. Elon Musk sees this federal law as undermining the work of the DOGE team, whose original savings target of USD 2 trillion has also already had to be significantly reduced.
The rating agency Moody’s downgraded the US credit rating from the top rating of “Aaa” to “Aa1” on May 15, 2025 due to a lack of fiscal policy discipline. In recent weeks, yields on 30-year US government bonds have briefly risen above the 5% threshold again. The US dollar index DXY, which measures the development of the greenback against important benchmark currencies, is continuing its downward trend. The capital markets are rightly looking with increasing concern at the long-term effects of an unbalanced US budget. According to a survey by Bank of America, short positions in the US dollar are even perceived as the most crowded trade.
However, we do not want to join in a swan song for the US dollar, US government bonds and for investments in the US. Despite somewhat weaker demand for US government bonds at recent auctions, US Treasuries remain the largest currency market with an outstanding volume of around USD 29 trillion – far ahead of Japan, whose currency market is only around a third of this size. The US market’s depth of liquidity remains “without alternative” for the time being. In addition, the US central bank continues to stand for independence and stability, despite the US administration’s attempts to influence it. At the same time, numerous US companies remain the measure of all things in terms of innovation and profitability, particularly when it comes to promising technologies.
In the long term, however, US policymakers will probably have no choice: The budget deficit must be reduced through unpopular spending cuts. Merely hoping for higher revenues through increasing growth and tariffs will not calm the bond market in the long term. Until this painful realization leads to tangible measures, a further rise in yields on US government bonds and an additional devaluation of the US dollar cannot be ruled out. An overweight in the US currency and taking a long duration on the bond side therefore make little sense in our view, while strong companies with high innovative strength, low debt and reasonable valuations can represent a real alternative. A conscientious approach to the current macroeconomic risks is the imperative of the moment.
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