US outlook: debt holders should brace for impact

America’s financial outlook has darkened under Donald Trump’s leadership. All three major credit-rating agencies now rank US federal debt one notch below triple A, and Jamie Dimon, the Chairman and CEO of JPMorgan Chase, warns of a crack in the US bond market. With the 10-year US Treasury yield still only 4.41% on June 13, 2025 – while the 30-year rate is at 4.9% – holders of nominal US debt should be prepared for significant real losses.The principal risk is not US sovereign default, but rather unexpected increases in medium- and long-term interest rates, owing to market expectations higher inflation. Fiscal policy under Trump is unsustainable, as it was under Joe Biden, but even more so if the administration’s "big, beautiful” budget passes in anything like its current form.The January 2025 Financial Report of the US Government makes this clear. The US ratio of federal debt held by the public to GDP at the end of the 2024 fiscal year was around 98%, although $4.7tn of the $28.3tn in federal debt was held by the Federal Reserve – meaning it is erroneously categorised as held by the "public,” when really the central bank’s accounts should be consolidated with those of the federal government.Under current policy and based on the report’s assumptions, federal debt held by the public would reach 535% of GDP by 2099. Stabilising the US debt-to-GDP ratio requires that the annual primary federal deficit (excluding interest payments) fall by an average of 4.3% of GDP over the next 75 years. And yet, the federal deficit and primary deficit were 6.4% and 3.3% of GDP, respectively, in fiscal year 2024 – far above what can be justified with the economy near full employment.With the US Congress so dysfunctional, no one has any faith that it will deliver the required deficit reduction. Democrats do not do permanent spending cuts, and Republicans do not do permanent tax increases. The federal government does own about 28% of US land (roughly 640mn acres), as well as other real commercial assets that could yield significant additional non-tax revenues if properly managed. But neither party – nor even the misnamed Department of Government Efficiency – appears to have considered this option, so the federal deficit as a share of GDP is likely to rise over the next few years.With no foreseeable improvement in fiscal policy, there are two possible outcomes. First, the government could default. There has long been a small, but recurrent, risk of a technical, short-lived default if Congress fails to raise, suspend, extend, revise, or abolish the federal debt ceiling on time. Fortunately, it has averted this scenario 78 times since 1960, and we expect it to continue doing so.As matters stand, the debt ceiling (including debt held by federal agencies) is set at $36.10400tn, and debt subject to the limit is $36.10397tn. If needed, the Treasury has a highly liquid asset (the Treasury General Account held with the Fed) worth $332.9bn that it can use to meet its obligations; and it may temporarily use "extraordinary measures to continue to borrow additional amounts for a limited time.”The second, more likely, possibility is that the Fed will monetise enough federal debt to prevent default. Since US federal debt is serviced in dollars, "printing money” is always an option. But, as the Fed well knows, a large-scale monetisation of federal debt would result in significantly above-target inflation. We believe the Fed will do this without its operational independence being revoked by Trump.To get the Federal Open Market Committee to do something it does not want to do, the President would need to control the majority of its 12 voting members. These include the seven members of the Federal Reserve Board of Governors and five (out of 12) regional Reserve Bank presidents who vote at any given FOMC meeting.