“Trump’s policies are increasing the risk of a US debt crisis,” Oliver said in a recent market note, highlighting the return of market focus on the country’s growing fiscal imbalances.
“Worries about the size of the US budget deficit and public debt have been around for decades with periodic flare-ups. In fact, the debt clock near Times Square first appeared in 1989,” the chief economist said.
For years, Oliver said, persistently low bond yields had masked the risks associated with ballooning debt levels.
“Because bond yields have been mostly low despite ever-rising debt, it hasn’t really been a problem. However, this has changed,” he added.
The key shift, he said, is the rise in yields – with the US 10-year Treasury hovering around 4.6 per cent – pushing federal interest payments to a record 18 per cent of tax revenue.
“If you push through 4.7 per cent, that would be a bad technical sign and therefore it could start to become a problem,” Oliver elaborated on an episode of the Relative Return Insider podcast.
While bonds are not yet in “extreme turmoil”, Oliver said “they’re at risk of it”.
Riling bond markets is the political debate over the so-called “One Big Beautiful Act” (OBBA), which aims to extend and expand the 2017 tax cuts. The proposed legislation has reignited concerns about fiscal sustainability, with critics warning it could significantly worsen the already large US budget deficit.
Those fears were amplified last week, when the bill narrowly passed the US House of Representatives by just one vote, a development that sent bond yields sharply higher.
Moreover, Oliver highlighted Moody’s downgrade of the US credit rating from AAA to Aa1, noting that while the agency was just catching up to earlier downgrades by S&P and Fitch, “US Federal debt is now much higher than it was when S&P downgraded the US credit rating in 2011”.
“Projections by the US Congressional Budget Office indicate that the tax cut bill will keep the budget deficit around 7 per cent of GDP which is well above the 3 per cent or so of GDP necessary to stabilise the debt to GDP ratio,” he said.
“Which means the debt-to-GDP ratio will keep rising indefinitely.”
That, he warned, raises the risk that foreign investors may lose appetite for US bonds, a concern already hinted at by a weakening US dollar.
“[This] in turn runs the risk of even higher US bond yields putting pressure on Trump and Congress to put the deficit and debt on a more sustainable path,” Oliver said.
Also shifting focus to the “uncertainty premium” pushing up yields, Robert Almeida, global investment strategist at MFS Investment Management, said investors in Treasury bonds are increasingly sensitive to new sources of risk.
"While the trade war may or may not evolve into a full-fledged capital and liquidity war, a long ignored chronic risk, the US budget deficit may now become an acute risk.
"While we’re not expecting anything resembling a debt crisis in the US, borrowing costs for consumers and corporations may remain elevated in the face of a lower federal funds rate later this year."
That shift, Almeida added, could mark the end of years of outperformance by passive investment strategies and signal the start of a regime where fundamentals, not policymakers, drive market outcomes.
While a return to fiscal discipline may eventually follow, Oliver cautioned, “the process to get to this could be quite volatile”.
Ultimately, the chief economist said while technical indicators are positive for shares, high macroeconomic risk around tariffs, the growth outlook and US debt sustainability mean that the ride is likely to remain volatile in the months ahead and another leg down remains a high risk.
“We continue to see Trump pivoting from the focus on tariffs to tax cuts and deregulation which, along with rate cuts from the Fed in the third quarter and other central banks, should help shares stage a more sustainable recovery,” Oliver said.
To hear more from Shane Oliver, click here.
