For a special Independence Day episode, our Head of Corporate
Credit Research considers a popular topic of debate, on holidays
or otherwise – national debt.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley.
Today on a special Independence Day episode of the podcast, we're
going to talk a bit about the history of U.S. debt and the
contrast between corporate and federal debt trajectories.
It's Thursday, July 3rd at 9am in Seattle.
The 4th of July, which represents the U.S. declaring independence
from Great Britain, remains one of my favorite holidays. A time
to gather with friends and family and celebrate what America is –
and what it can still be.
It is also, of course, a good excuse to talk about debt.
Declaring independence is one thing, but fighting and beating the
largest empire in the world at the time would take more than
poetic words. The borrowing that made victory possible for the
colonies also almost brought them down in the 1780s under a pile
of unsustainable debt. It was a young treasury secretary
Alexander Hamilton, who successfully lobbied to bring these debts
under a federal umbrella – binding the nation together and
securing a lower borrowing cost. As we'd say, it's a real fixed
income win-win.
Almost 250 years later, the benefits of that foresight are still
going strong, with the United States of America enjoying the
world's largest economy, and the largest and most liquid equity
and bond markets. Yet lately there's been more focus on whether
those bond markets are, well, too large.
The U.S. currently runs a budget deficit of about 7 percent of
GDP, and the current budget proposals in the house and the Senate
could drive an additional 4 trillion of borrowing over the next
decade above that already hefty baseline. Forecast even further
out, well, they look even more challenging.
We are not worried about the U.S. government's ability to pay its
bills. And to be clear, in the near term, we are forecasting at
Morgan Stanley, U.S. government yields to go down as growth slows
and the Federal Reserve cuts rates more than expected in 2026.
But all of this borrowing and all the uncertainty around it – it
should increase risk premiums for longer term bonds and drive a
steeper yield curve.
So, it's notable then – as we celebrate America's birthday and
discuss its borrowing – that it's really companies that are
currently unwrapping the presents. Corporate balance sheets, in
contrast, are in very good shape, as corporate borrowing trends
have diverged from those of the government.
Many factors are behind this. Corporate profitability is strong.
Companies use the post-COVID period to refinance debt at
attractive rates. And the ongoing uncertainty – well, it's kept
management more conservative than they would otherwise be. Out of
deference to the 4th of July, I've focused so far on the United
States. But we see the same trend in Europe, where more
conservative balance sheet trends and less relative issuance to
governments is showing up on a year-over-year basis. With
companies borrowing relatively less and governments borrowing
relatively more, the difference between what companies and the
government pay, that so-called spread that we talk so much about
– well, we think it can stay lower and more compressed than it
otherwise would.
We don't think this necessarily applies to the low ratings such
as single B or lower borrowers, where these better balance sheet
trends simply aren't as clear. But overall, a divergent trend
between corporate and government balance sheets is giving
corporate bond investors something additional to celebrate over
the weekend.
Thank you as always for your time. If you find Thoughts on the
Market useful, let us know by leaving a review wherever you
listen, and also tell a friend or colleague about us today.
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