Unraveling the Rising Concerns Over America’s Growing Debt Burden

At the beginning of the year, uncertainty surrounded the trajectory of U.S. economic policy under the current administration, and market reactions remained unpredictable. Initially, markets rallied, but following the introduction of tariffs and significant political events, sell-offs occurred. Subsequently, as tariffs were eased, stock markets regained momentum.

Attention is now turning to the largest financial market: the $29 trillion U.S. Treasury market. This market represents the purest convergence of macroeconomic forces and political decision-making, and any signs of instability here raise serious alarms.

Unlike equities, the Treasury market revolves solely around U.S. government debt instruments of different maturities. The prevailing economic framework considers inflation as a key factor—higher inflation diminishes bond values—while political dynamics focus on Congress’s capacity to manage the federal budget.

Between these forces stands the Federal Reserve, wielding influence through interest rate adjustments and, if necessary, large-scale purchases of government debt. Given the Fed’s authority, default on U.S. obligations seems unlikely, provided there is no deliberate political obstruction. However, if debt payments depend on increased money printing, the purchasing power of the dollar—and consequently the real value of the $29 trillion debt—could be significantly affected.

This complex interplay is contributing to growing unease within the Treasury market.

Recent credit rating downgrades of U.S. debt reflect this anxiety but are more symptomatic than causative. Inflation remains relatively contained at under 3 percent, so it is not the primary source of concern.

The core challenge lies in political developments. Market participants are becoming increasingly aware of expanding Republican-led deficits—rising to nearly 7 percent of GDP from below 6 percent—the party’s steadfast refusal to pursue meaningful revenue-raising measures, and a communication approach reminiscent of denial surrounding fiscal realities. Additionally, there appears to be a deliberate policy to discourage foreign capital investment by depreciating the dollar, with discussions even emerging about imposing taxes on foreign inflows.