Citi analysts predict that rising U.S. government debt and fiscal deficits will become secondary concerns for investors as their focus shifts towards economic fundamentals
Concerns about increased government bond supply and larger fiscal deficits led to a surge in government bond yields to 16-year highs, prompting negative creditworthiness assessments from rating agencies Fitch and Moody's
Despite persistent challenges, investors are expected to grow accustomed to fiscal risks due to the lack of alternatives, given the U.S. dollar's global reserve currency status and the depth of the U.S. government bond market
Nathan Sheets, global chief economist at Citi, emphasizes the role of the U.S. dollar and Treasuries as reserve assets, limiting investors' options and suggesting a scenario where fiscal risks recede into the background
Citi's baseline expectation is that over time, investors will accept fiscal risks as a fact of life, with Treasury yields being more influenced by economic fundamentals rather than supply and demand dynamics
The nonpartisan Congressional Budget Office (CBO) estimates cumulative budget deficits of about $20 trillion in the coming decade, signaling ongoing fiscal challenges
Moody's, having lowered its outlook on U.S. credit, anticipates the government will continue to run wide fiscal deficits due to increased spending and higher debt interest payments
Hedge fund Bridgewater Associates' Ray Dalio warns of a U.S. debt crisis, emphasizing the unsustainable trajectory of adding to debt faster than income growth
Despite earlier surges, Treasury yields have recently retrenched, driven by expectations that the Federal Reserve has peaked in its interest-rate hiking cycle and a more modest year-end schedule of Treasury debt sales
The Federal Reserve's reduction of bond holdings to curb inflation leaves price-sensitive private investors to fill the gap, highlighting the challenge authorities face in influencing the demand side of the bond market