Surging U.S. government debt may sap investor appetite for key U.S. assets like long-dated Treasuries and the dollar, bolstering the case for turning to opportunities beyond U.S. borders, BlackRock said on Monday.
President Donald Trump's tariffs spurred market volatility this year and raised doubts over the dollar's status as the world's reserve currency. Fears of de-dollarization remain far-fetched but rising government debt could increase that risk, said fixed income executives at the world's largest asset manager.
"We’ve been highlighting the precarious position of the U.S. government’s indebtedness for some time now, and, if left unchecked, we view debt as the single greatest risk to the 'special status' of the U.S. in financial markets," they said in a third-quarter fixed income outlook note.
Higher government debt could reduce the correlation between the direction of long-dated Treasury yields and monetary policy in the United States, BlackRock said, with yields rising despite the Federal Reserve cutting interest rates. Increased supply of U.S. government debt is likely to be met with lower demand from the Fed as well as foreign central banks.
That argues for diversification outside of the U.S. government bond market and for more exposure to short-dated U.S. Treasuries that could benefit from interest rate cuts, the asset manager said.
"Despite proposed spending cuts, deficits are still climbing - and more of that spending is now going toward interest payments," said BlackRock's investment managers.
"With foreign investors stepping back and the government issuing more than half a trillion dollars of debt weekly, the risk of private markets being unable to absorb this debt and consequently pushing government borrowing costs higher, is tangible," they added.
