As debates swirl around the fiscal implications of the Trump administration’s proposed tax cuts and their potential to exacerbate the US budget deficit, Bridgewater Associates, the world’s largest hedge fund, sees little cause for alarm, according to a report by MorningStar.
What truly matters to bond markets in Bridgewater’s view is the combined impact of public and private-sector debt, not just the federal deficit.
The report cites the firm as arguing in a research note co-authored by Larry Cofsky, Bridgewater’s Co-Head of Fixed Income Research, that the interaction between public borrowing and private credit creation is key.
“Public and private debt are reasonably fungible as both an asset and a source of spending,” the note reads. “What matters for markets and the economy is how much collective new credit is being created and the willingness of investors to absorb it.”
Bridgewater highlights that overall credit creation in the US is currently unremarkable. While public borrowing has surged, private-sector borrowing remains subdued after its pandemic-era peak. The result? Total borrowing is in line with its 30-year average.
This balanced dynamic has kept bond market risk premiums steady. “The risk premiums on the long end of the yield curve are about average, with no signs that economic or debt thresholds are being breached,” Bridgewater noted. This contrasts with periods of heightened borrowing—such as during the 1980s, the global financial crisis, or the height of the Covid-19 pandemic—when yields and risk premiums spiked.
Bridgewater also points to a favourable environment for bond investors. With yields at attractive levels, unlevered investors, such as pension funds and insurers, remain under-allocated to bonds relative to their long-term targets. Additionally, banks, which have been cautious bond buyers, could increase purchases if the yield curve steepens—a scenario that could unfold if the Federal Reserve eases monetary policy further.
While Bridgewater remains sanguine for now, the firm acknowledges potential risks if fiscal policy becomes overly aggressive. “If the Trump administration pushes fiscal spending to a point where the private sector can no longer offset the higher deficit, issues could emerge,” the note warns.
Bridgewater’s outlook suggests that despite headline concerns about the federal deficit, bond markets remain stable due to the broader debt equilibrium. This perspective aligns with recent market performance, as the 10-year Treasury yield (4.425%) continues to hold steady, reflecting investor confidence in debt absorption.
Bridgewater’s stance underscores its confidence in the US bond market’s ability to absorb elevated public borrowing, provided private-sector debt remains restrained. While the firm sees little reason for immediate concern, it acknowledges that fiscal overreach could disrupt this balance, with inflation and political constraints serving as natural brakes on policy excess.
