12/14/25
S&P 500: 6827
Nasdaq: 23,195
10 Year Treasury: 4.1%
David R. Snyder, CFA
According to the consensus one of the biggest risks to the stock and bond markets is the 100% US debt to GDP. Many have been arguing that 10 year Treasury bonds will trade down as the Fed lowers interest rates. They cite the fall of 2024 as an example as the yield fell from 4.74% in April to 3.6% right before the Fed made its first cut in September. The yield then rose to 4.45% by February of 2025. But that was a case of the bond market anticipating the Fed cut. Also both economic and inflation data spiked at the end of 2024, limiting further Fed rate cuts in 2025. A very unique case. It had nothing to do with rising US Treasury debt. The US Treasury 10 year yield is currently 4.1% which is about 160 basis points above the expected inflation rate. This is in line with the average since the early 1950’s of 165 basis points (although it has been highly variable with the highest real rate of 8% in 1982 and the lowest real rate of -5% in 2022). Everybody has got this trade wrong as the 10 year yield has fallen this year. Over most time frames of the last couple of years, the 10 year Treasury has been a better investment than shorter term bonds. I have been bullish on the 10 year Treasury for the last couple of years especially when it rose to the mid to high 4’s which has been the right contrarian call. At the 4.1% level I am neutral but expect rates to move up next year.
The biggest risk for the consensus is for inflation and long term bond yields to rise due to the increasing government debt over the next decade. The projected tariff revenue to reduce the future deficits will be much lower than projections as companies relocate to lower tariff countries or back to the US. If the bond vigilantes take longer term bond yields higher because of higher debt levels, the US government will simply finally reduce deficits, which will slow economic growth and keep inflation lower. Developed countries react differently than emerging markets when responding to big budget deficits. They have the economic and political wherewithal to take action to reduce deficits when pressed. We know what will happen because it already played out in the European sovereign debt crisis in 2010-12. Spain and Italian 10 year sovereign debt yields spiked to 6 to 7%. But European countries in response cut their budget deficits which resulted in a second recession and a very slow economy for the rest of the decade. Inflation remained low and bond yields retreated back to normal levels. That is exactly what is likely to happen in the US if yields surge. The bad news is that it took SpaIn and Italy until 2024 to reach 2008 GDP levels, a lost 15 years. Even in Euros it took until 2018 to reach 2008 GDP levels.
However, in the last few years both Spain and Portugal have been able to reduce their budget deficit/GDP ratios significantly through public spending reductions and increased immigration. Immigrants pay more in to the system than they take out and are very positive for GDP growth. Spain has reduced their debt/GDP ratio from 134% in 2020 to 100% in 2024 while Portugal has reduced the same ratio from 138% in 2020 to 98% in 2024 with low rates of inflation. However, both ratios are only back to their 2016 levels.
There is a big myth that the only way out of higher debt to GDP ratios is to inflate and grow nominal GDP faster than the increase in annual federal budget deficit. This is not true as just shown in the cases of Spain and Portugal over the last few years. Government debt held by the public in the US went from 104% in 1945 to 34% in 1967. During that time period US government debt increased 27%, an average annual compound rate of 1.3% while inflation compounded at a 3.4% annual rate (slightly above the long term average of 3%). We actually reduced the deficit dramatically with high real GDP growth, fiscal discipline, and average inflation, not with high rates of inflation. The US debt to GDP ratio bottomed in 1973 at 27% but then flatlined until the early 1980’s despite hyperinflation.
The debt to GDP ratio is back to over 100%, but this time the US will stay in a real rut as immigration levels stay low over the next couple of years and substantial annual budget deficits continue to increase the debt to GDP ratio. However, even in a worst case scenario of debt rising to 128% of GDP, the US would only have the same ratio as that of Italy. Currently Italy’s sovereign 10 year debt is yielding 3.5%, 60 basis points below the US 10 Treasury bond. Thus, no credit concerns at 128% debt to GDP ratio.
Global debt to GDP ratio has risen from 292% in 2008 to 324% in 2025. Non-financial global corporate debt has risen from 79% to 92% of global GDP since 2008. In the US, debt has grown from 290% to 335%. Household debt was transferred to government debt while the corporate debt to GDP ratio only increased moderately. These historically high debt levels are not at stress levels because interest rates have been so low since the financial crisis. However, interest rates and especially real interest rates have been rising since 2022. About 38% of corporate debt will be refinanced by 2030, with rates averaging about 200 basis points higher, which will be a headwind to corporate earnings especially when spreads widen.
The higher rate refinancing will be a real issue in the future as the median company in the S&P 500 has a net debt/EBITDA of 1.9, which is in the 93rd percentile since 1980. Lower interest rates have hidden this potential problem as interest coverage is high. Another issue is that BBB corporate bonds now make up over 50% of investment grade bonds, an increase from 38% in the early 2000’s. Many institutions have to sell corporate bonds when they are downgraded to junk status, thus a downgrade of the lowest grade investment bonds can set off panic selling. But the most vulnerable part of the debt market is the $2.1 trillion private credit market. This sector of the market has not been tested in downturns. We have not had a true downturn in the credit cycle since 2008, which is unusually long. There are many excesses in this sector.
Full Disclosure: I own several of the securities mentioned positively. None have been purchased within the last month. The opinions merely represent the opinion of the author as CIO of Journey 1 Advisors, LLC and intended to inform the readers about our investment philosophy and strategy. The contents of this report are based on sources believed to be reliable. It is not intended for circulation. It is not intended to offer investment advice, or to recommend the purchase or sale of any securities or investment product. Investment advice is only given after a client has signed an investment advisory agreement with Journey 1 Advisors, LLC and will be subject to the terms and conditions therein. Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stock’s expected performance and risk.