The Sovereign Story: Unearthing Value in Government Debt

At a time when federal deficits and interest payments dominate headlines, the U.S. stands at a pivotal juncture. The latest analysis from the Congressional Budget Office (CBO) projects a dramatic rise in public debt, with the debt held by the public soaring from $21 trillion today to over $56 trillion by 2036, fueling debates about fiscal sustainability and economic resilience.

A Fiscal Crossroads: The CBO’s 2026 Outlook

The February 2026 CBO report offers a sobering glimpse into the future. Debt held by the public is expected to climb to 120% of GDP by 2036, marking a substantial leap from its current ratio of 99%. Behind these figures lies a story of policy choices, demographic shifts, and market forces converging to create an unprecedented financial landscape.

Key drivers include ballooning federal debt-to-GDP ratio, rising interest obligations projected to surpass $2.1 trillion annually, and persistent annual deficits averaging 6.1% of GDP over the next decade.

This trajectory reflects a $1.4 trillion upward revision since the January 2025 outlook, driven by higher inflation, unexpected economic slowdowns, and recently enacted tax and spending measures. Total net interest costs are forecast to consume nearly 19% of federal outlays by FY2036, intensifying the debate over budget priorities.

Yet, nestled within these daunting statistics lies an investment narrative worth exploring: U.S. Treasuries remain the bedrock of global finance, offering unmatched liquidity, credit quality, and relative yield.

Despite the alarming statistics, Treasuries have historically absorbed spikes in supply without triggering crisis, thanks to their status as the world’s default safe asset.

From Crisis to Confidence: Learning from History

The United States has weathered towering debt peaks before. In the aftermath of World War II, public debt surpassed 106% of GDP, yet a combination of robust economic growth, higher tax rates, and targeted spending effectively reduced that burden over two decades. The GI Bill’s investments in education and housing, along with major infrastructure projects, powered this recovery.

Similarly, the early 1980s saw debt rise with defense spending and tax reforms, only for subsequent fiscal restraint and innovation-led growth to restore confidence. These cycles underscore the nation’s ability to pair strategic policy with economic dynamism.

Indeed, the memory of historical peaks surpassing World War II galvanizes both investors and policymakers to pursue approaches that balance near-term support with long-term debt reduction.

Policy Drivers and Deficit Pressures

Several intersecting factors drive the swelling deficit, each demanding careful analysis and potential reform:

• Mandatory spending growth for Social Security and Medicare, propelled by increasing pressures from aging demographics and rising life expectancy.
• Escalating healthcare costs, with mandatory health programs projected to exceed $7 trillion annually by FY2036.
• Soaring net interest outlays as 10-year Treasury rates stabilize above 4.4%, placing upward pressure on borrowing costs.
• Legislative legacies—such as recent tax cuts and tariff policies—have added trillions to cumulative deficits, offsetting only a fraction of entitlement spending increases.

Combined, these trends have cemented a structural deficit that requires innovative solutions rather than reliance on cyclical booms alone.

Risks on the Horizon: Crowding Out and Crisis Warnings

Even as Treasuries maintain their safe-haven reputation, rising debt levels introduce genuine vulnerabilities. Persistent deficits can exert a crowding out private investment growth as government securities absorb an increasing share of available capital, potentially hampering business expansion and innovation.

Credit agencies have sounded alarms: Moody’s recent downgrade to Aa1 reflected concerns over long-term fiscal trajectories, while Standard & Poor’s has flagged the dwindling gap between U.S. borrowing costs and those of peer nations.

Moreover, the dollar’s reserve status—once unassailable—faces pressure as some global investors begin diversifying into alternative assets, from gold to rival sovereign bonds.

• Potential spikes in Treasury yields if global risk appetites shift abruptly.
• Diminished fiscal flexibility in downturns, as higher debt limits room for stimulus.
• Long-term inflation expectations that could erode real returns if unchecked.

Unearthing Value: Treasuries as a Sovereign Premium Asset

Amid these challenges, a compelling investment thesis emerges: U.S. Treasuries continue to embody a reserve currency dominance and stability unmatched in global markets. Yields in the 4.1%–4.4% range not only exceed long-term averages but also provide a reliable anchor when risk assets falter.

During the 2008 financial crisis and the 2020 pandemic, Treasuries absorbed massive inflows, underscoring their defensive appeal. Institutional allocations from central banks, pension funds, and sovereign wealth funds total over $20 trillion, reinforcing the asset class’s depth and resilience.

Discussions around financial repression and monetary tools reveal how policymakers can shape demand: by mandating higher Treasury allocations for regulated entities, deploying quantitative easing, or tolerating mild inflation to erode real liabilities.

For yield-seeking investors, these dynamics translate into compelling yield opportunities for investors while retaining low credit risk—an equilibrium rarely found elsewhere.

• Financial Repression: Regulatory incentives for banks and pension funds to hold long-term Treasuries.
• Inflation Management: Moderate inflation that reduces real debt burdens without derailing nominal yields.
• Quantitative Easing: Fed purchases that support liquidity and cap long-term borrowing costs.
• Growth-Out Strategies: Targeted infrastructure and technology spending to boost GDP growth relative to debt accumulation.

Charting a Sustainable Path: Fixes and Forward

While extracting value from sovereign debt is entirely feasible, the overarching imperative remains long-term fiscal sustainability measures that secure economic stability for future generations. Achieving this balance demands bipartisan commitment.

The CRFB’s “Debt Fixer” model suggests that a combination of targeted revenue enhancements—such as broadening the tax base—and prudent spending restraint could stabilize debt near 100% of GDP by 2036. Likewise, the Peterson Foundation advocates comprehensive tax code reform to spur growth and maintain fairness.

Progress likely hinges on a willingness to address entitlement reforms, streamline healthcare costs, and invest in high-return public goods—solutions that simultaneously underpin economic performance and debt management.

For investors, monitoring these policy debates offers critical insight into the future path of yields, credit spreads, and currency dynamics—informing portfolio strategies that blend income, duration, and diversification.

Conclusion: A Narrative of Resilience and Opportunity

The sovereign story of U.S. government debt transcends alarmist narratives. It is a chronicle of a financial system anchored by the U.S. dollar, endowed with policy tools and a proven track record of adapting to fiscal stress.

Treasuries, by virtue of their liquidity, credit standing, and global demand, stand as a sovereign premium asset status in diversified portfolios. Investors who embrace this narrative can navigate market volatility with confidence, capturing both the defensive qualities of government bonds and the upside of policy-driven repricing.

As conversations shift from fear to action—recognizing both the risks and opportunities—stakeholders across government, markets, and civil society can collaborate on solutions that marry growth with fiscal responsibility. In this evolving landscape, the sovereign story offers not just a cautionary tale, but a blueprint for value creation amid complexity.