Nordea: US Debt

The US debt outlook is not yet a major source of market stress, as strong growth is helping contain debt ratios despite sizeable deficits. The recent rise in long-term yields has largely reflected higher real rates, driven by competition for capital from government borrowing and heavy data-centre investment. Strong growth and expected returns help justify higher rates, while term premiums have so far remained broadly stable. However, this balance could deteriorate if growth slows or deficits widen further. The CBO’s projections may underestimate the longer-term fiscal challenge. Its interest-rate assumptions are below current market pricing, meaning deficits could be around 1 percentage point higher if market rates prevail. Healthcare and social security spending also appear understated, with demographic trends suggesting outlays on Medicaid, Medicare and pensions could exceed forecasts by several percentage points. Meanwhile, although Democrats could push for reversing Medicaid cuts and raising taxes on higher earners after the midterms, major changes may be blocked by a presidential veto, and there is little historical evidence of politicians delivering lasting fiscal solutions.