This Week in Review | US Debt, Global Bond Yields, US-Canada Trade

Transcript

Hello and welcome to This Week in Review. This weekly segment is designed to highlight a few things you may have missed this week, what they could mean for financial markets, and why they matter to investors like you. To stay up to date with our latest market insights, subscribe to our YouTube channel or visit Fisher investments.com. Now let's review what happened this week.

First US debt.

This week, total US public debt surpassed $40 trillion, renewing familiar debate about the country's fiscal outlook. It's a striking number, but the reality is US debt has been building for decades, driven by persistent deficits, age-related spending, and major shocks like the global financial crisis and pandemic-era relief.

Now, for investors, the key question is not the total level of debt. It's whether the government can service its debt, and current evidence says that it can. Demand for Treasury securities remains broad, and while interest costs are high in dollar terms, they consume a manageable share of federal tax revenue, very comparable with the late 1980s and early 1990s periods that were perfectly workable for the economy and stock market.

Now inflation matters, too. It reduces the real value of fixed-rate debt over time, while rising prices and wages lift nominal tax revenues. So a higher dollar-debt total does not automatically mean a proportionately heavier burden. Now, could US debt become a bigger problem eventually? Certainly. Are we endorsing proliferate government spending? No. But a genuine debt crisis would likely show up in sharply rising borrowing costs and weakening Treasury demand. We do not see that today. Treasury yields have risen, and we'll talk about that momentarily, but they remain well below levels typically associated with a sovereign debt crisis.

So $40 trillion is a headline-making milestone. And it may drum up strong emotions. We understand that. But to us, it appears the US can keep borrowing and servicing its debt at sustainable rates for the foreseeable future.

Next, rising government bond yields.

One place a true debt problem would likely show up first is in government bond yields. And indeed, long-term Treasury yields have risen recently, with the 30-year yield moving above 5.2%, near its highest level in roughly 19 years.

But perspective is important. The 30-year yield is elevated relative to the unusually low-rate years after the global financial crisis. But, and critically, it remains below its long-run historical average. The Treasury's decision Wednesday to increase buybacks of longer-dated bonds to support market liquidity fits that picture. Policy makers are monitoring the market, not responding to a market break.

And this is not a US only story. Long-term yields have also risen in Japan, Germany, France and the United Kingdom. Rising rates naturally revive familiar worries about inflation, borrowing costs and whether heavy government deficits or today's large AI-related corporate borrowing could overwhelm demand for bonds. But rising Treasury yields alone do not tell us whether borrowing conditions are becoming broadly restrictive. To assess that, look beyond government bonds to the broader credit market.

Now, if investors fear new debt issuance was overwhelming bond demand or that financial conditions were deteriorating, they would likely demand a much larger premium to lend to companies. So far, they're not. Corporate bond spreads, which is the extra yield companies pay over comparable Treasurys remain tight. That suggests investors are not demanding much more compensation for perceived credit risk.

If new borrowing were straining markets or if broader credit stress were developing, spreads would likely be much wider. And for markets, it's important to remember high yields also do not dictate stock returns, earnings, economic growth, sentiment, lending conditions and more all matter too.

So for now, higher yields look more like normal bond market volatility rather than a meaningful change in the market outlook.

Finally, US-Canada trade negotiations.

This week, the United States delayed new 50% tariffs on roughly $20 billion of Canadian goods for three days, while the two countries worked to finalize a trade agreement. Reports also suggest negotiations are discussing a broader framework that could lower duties on Canadian steel, aluminum and automobiles, though the final terms remain unsettled.

The talks matter because Mexico and Canada are the United States' two largest goods-trade partners, and the USMCA provides the framework for much of that highly integrated trade. But investors should be careful not to treat any one announcement as the final outcome. Trade negotiations rarely move in a straight line. Deadlines shift, exemptions emerge, and details can keep changing long after an initial headline.

Now we view tariffs as an economic negative. But US-Canada trade policy has been a dominant discussion for well over a year, and markets have had considerable time to weigh the possible effects and incorporate much of that uncertainty into prices. For investors, remember, markets are ultimately more influenced by surprise than by widely discussed risks. While trade policy is important, tariff headlines have become increasingly familiar and familiarity tends to reduce their ability to shock markets.

That's it for this week. Thanks for tuning in to This Week in Review. If you're looking for more insights, don't miss our other series, Three Things You Need to Know This Week, released every Monday. You can also visit Fisher investments.com anytime for our latest thoughts on markets. Thanks again for joining us, and don't forget to like and subscribe.