“Now four months into the fiscal year, the U.S. government has run a cumulative deficit of $697 billion—that’s 17% lower than the same period in FY 2025. The early improvement reflects a 12% year-overyear increase in revenues, with income tax receipts suggesting a still-healthy labor market backdrop. Still, between trillion dollar interest payments, tax cuts from the One Big Beautiful Bill Act (OBBBA), and the push for affordability relief ahead of the midterms, Uncle Sam is likely looking at another year of the deficit running from 5% to 6% of gross domestic product (GDP). For now, the bond vigilantes have been quiet in the U.S. but could return should fiscal stimulus prove excessive. Against this backdrop, we remind investors that America’s future funding needs heavily depend on demand from investors overseas. We’re not too worried, however, in part because 2025 taught us that foreign demand for U.S. assets is stickier than appreciated. Finally, the U.S. economy continues to grow above trend, keeping us sanguine on the U.S. fiscal situation.”
Morten W. Langer
