Highly indebted

US fiscal policy is clearly on an unsustainable path. Twin deficits — both fiscal and trade — are weighing on confidence. Net interest costs are elevated, borrowing now finances over a quarter of government spending, and the term premium continues to rise. Markets remain calm for now, but stress could surface quickly, particularly if Treasury auctions begin to falter.

A scenario of gradually higher long-term rates and a steeper yield curve looks increasingly plausible. Should instability emerge, the Fed may feel forced to intervene again with QE — delaying, not resolving, the underlying issues.

At ECP, we don’t position portfolios on macro predictions. From a European investor’s perspective, holding long-duration US bonds offers little value in the current environment. On the equity side, our focus remains on companies with robust cash flows and strong balance sheets — the best defense against rising rates and fiscal deterioration. US exporters, meanwhile, are benefiting from a weakening dollar.