Borrowed Time? Downside Scenarios on the US Debt Overhang

The initiation of the rate-hike cycle by the Federal Reserve in 2022 has positioned U.S. monetary policy as a major driver of financial markets. The projected surge in public debt may shift attention to fiscal policy, however. The Congressional Budget Office anticipates U.S. public debt could escalate to a record 116% of GDP over the next decade.^[1] While a U.S. default is highly unlikely, historical instances of debt-ceiling tensions suggest potential market disruptions and expanding public debt could have further implications for the world’s largest economy. This blog post explores two downside scenarios for financial markets as investors consider their path forward. The first considers potential macroeconomic effects and their portfolio impact and another that assumes deteriorating U.S. sovereign-debt levels and upward pressure on interest rates may hurt riskier assets and trigger a market sell-off. The…