According to the OECD’s Global Debt Report 2025, nearly 45% of OECD government bonds are set to mature before the end of 2027. For France, Spain, the UK and the US – four countries identified in the report as having “heightened vulnerability” – such refinancing needs through 2027 are projected to push up interest payments as a share of GDP by ca. 0.4 percentage points. This at a time of elevated budget deficits, and aggregate OECD spending on interest payments that already exceeds defence spending. No wonder President Trump is so intent on persuading the Federal Reserve to cut interest rates further.
Recent developments in the US and European bond markets seem to point to growing concerns regarding the buildup of public debt. With long rates that are continuing to rise, even as short-term rates come down, the “term premium” is increasing. Part of this move can arguably be considered as a welcome normalisation, since buyers of longer-maturity bonds should be rewarded for their extended holding periods. But the steepening of the yield curve also reflects, in our view, persistently high inflation expectations and worrisome government debt/deficit trajectories.
Looking at the US in particular, the large share of short-dated Treasury bills in total government debt makes the annual budget highly sensitive to interest rates. Still, President Trump’s reasoning with regards to Federal Reserve (Fed) interest rate policy, appears rather simplistic. Pressuring the Fed to slash rates is akin to a car driver who, when running late, decides to drive faster – not taking into account the increased risk of an accident. Instead of focussing on lowering the cost of debt, the US government (and its counterparts in other developed markets) should attempt to slow down its buildup. That is, try to stabilise or even curtail annual government deficits. Which, of course, is no easy task given the considerable future spending needs in defence and infrastructure, and the perennial difficulties in cutting social security outlays.
Given these predominantly Western issues, it may be advisable to focus our attention a little more on the eastern part of the globe, notably via greater equity exposure to Pan-Asian markets and Japan. The latter also has a high debt ratio (albeit with much longer maturities and lower interest rates) but boasts a positive current account balance, meaning that the government does not have to rely on international capital flows to finance its borrowing. More importantly, the progress in Japanese corporate governance has been impressive over the past few years. The complex web of company cross-participations is being progressively dismantled, with cash generation being used instead for dividends and share buybacks. Corporate earnings-per-share growth has picked up and is now on par with that of US companies, while valuation multiples are much less elevated. Not to mention that wages are currently growing faster than prices, which is boosting consumer purchasing power and is positive for future economic growth.
Turning to China, the recent rally in domestic equity indices has been impressive, albeit fuelled by liquidity rather than fundamentals. Consumption indeed remains lacklustre and the real estate market depressed. As for corporate margins, fierce domestic competition is an increasing concern, the market for electric vehicles being a prime example. All this to say that, however bullish Chinese retail investors and local fund managers have become lately, a broader Pan-Asian exposure appears more appropriate for portfolios at this stage, rather than focussing solely on Chinese A-shares.
To summarise, the worrisome debt burden and geopolitical backdrop – particularly from a Western, and certainly European, perspective – suggests that a more balanced regional exposure in portfolios is advisable. And although investment opportunities are becoming increasingly scarce, given extended valuations and the considerable degree of uncertainty, our sector positioning continues to favour cyclical stocks over consumer-related sectors. The latter are bearing the brunt of import tariffs, downward pressure on social spending and weakening job markets. The former meanwhile stand to benefit from increased future defence and infrastructure spending – provided, of course, that governments can continue to raise sufficient funds in financial markets by issuing yet more government bonds…
