U.S. Fiscal Sustainability:
What Should Insurers Be Paying Attention To?

The strength of the U.S. Dollar, as well as the U.S.' fiscal debt, are ever present topics as domestic and global economic outlooks navigate uncertainty. We spoke with New England Asset Management to discuss the main issues facing the U.S.' fiscal sustainability and how this ties into how insurance companies might view their bond portfolio.

Jennifer Quisenberry | Chief Investment Officer | New England Asset Management
jennifer.quisenberry@neamgroup.com | Learn More >>

SAA: Why does the U.S. continue to face persistent fiscal deficits?

NEAM: The U.S. seems to have lost its way in terms of fiscal prudence. Historically, the U.S. ran massive budget deficits in response to crises – wars, deep depressions (Great Depression and Great Recession), and in response to the Covid-19 pandemic. After these crises, deficits typically returned to more moderate levels. However, beginning in the 1970s and except for a budget surplus in 2001, the nation's fiscal health has continued to deteriorate. Moody's expects this trend to continue, with the annual budget deficit projected to increase from 6.4% in 2024 to 9% by 2035. Why does this persist? Despite the objection of budget hawks within Congress, the unfortunate reality is that necessary corrective actions to bring the budget under control (raising taxes or cutting benefits) are politically unpalatable.

SAA: Are fiscal sustainability concerns driving down the value of the dollar?

NEAM: Fundamentally, the value of the dollar is determined by a multitude of factors including interest rate differentials, expected economic growth and inflation, and supply and demand for the currency. The value of the U.S. dollar is also underpinned by extraordinary funding capacity that allows the government to finance large annual fiscal deficits at relatively attractive costs, as well as a strong rule of law framework including Fed independence. Some of those additional (and critical) factors came into the spotlight in early 2025 with the budget resolution process and criticism of the Federal Reserve Chairman. That said, there were many other events affecting the dollar at that time: Euro strengthening on fiscal spending plans, weakness in the technology sector, Moody’s downgrade of the U.S. sovereign rating, and widespread reports of dollar hedging (bets on a decline in the value of the dollar). While it is impossible to attribute the extent of recent dollar weakness to fiscal discipline concerns, the market narrative and sovereign rating action serve as a reminder of those critical underpinnings of the U.S. Treasury market.

SAA: Could the U.S. dollar lose its role as the world’s reserve currency because of its growing debt burden?

NEAM: U.S. dollar assets as a percent of global central bank reserves have been declining for decades in response to shifting trade flows and diversification of reserve assets, especially after the U.S and its allies froze Russian foreign exchange reserves after the Ukraine invasion. Central banks’ holdings of gold reserves also increased, especially by countries seeking to hedge against geopolitical risk. Nonetheless, the U.S. dollar still holds the top position at 58% of reserves followed by the Euro at about 20%. In our view, the risk to U.S. Treasuries as the global reserve asset is low. The size, depth and liquidity of the Treasury market is unparalleled, nor is there a viable alternative considering the lack of a fully centralized banking system supporting the Euro, less liquidity and lack of short term supply in the yen, and capital controls governing the Chinese yuan. Finally, the U.S. dollar is firmly entrenched in global transactions, derivatives contracts, and as a pricing benchmark for other securities. It would be difficult to envision an unseating of the dollar from that position of dominance in the foreseeable future.

SAA: What could trigger a “buyer’s strike” in the bond market?

NEAM: A “buyer’s strike” in the bond market could be triggered by any number of things. Historically that has occurred following a policy misstep that is rejected by the market, the most recent example being in 2022 when the UK’s controversial mini budget proposing large, unfunded tax cuts lead to a collapse in the value of the British pound with spillover to the bond market. A technical event such as a negative surprise in the Treasury funding schedule, poor auction result, or rapid steepening of the yield curve could unsettle the market. One could even see anxiety in the bond market within the next decade as we move closer to the depletion of the trust fund supporting Social Security. More broadly (and concerning) would be an economic shock or event that significantly impairs the revenue side of the budget. So as we can see, any number of events could pressure the finances and financing of the U.S. government, which become even more precarious given the heightened current debt level.

SAA: For insurance companies, what should they be most concerned about when it comes to the US debt and their own portfolio? Where can they find optimism?

NEAM: Insurance companies should be comfortable allocating funds to U.S. treasury securities within their portfolios. The U.S. retains exceptional credit strengths in the size, resilience and dynamism of its economy and the role of the US dollar as global reserve currency and safe have asset in times of crisis. This status creates sustained demand for the dollar and global appeal of U.S. Treasury securities. Investors should be further comforted by the fact that the Federal Reserve has mechanisms to support the smooth functioning of the Treasury market and market stability more broadly through liquidity buyback operations and Section 13(3) provision, which enable the Treasury Department to take emergency action to support the smooth functioning of markets and financial stability.

However, as with all fixed income instruments, investing in Treasuries carries interest rate risk and the erosion of purchasing power due to inflation. While a modest allocation to Treasuries is appropriate for operational purposes, investing in high quality spread sectors such as corporate, municipal and structured securities can help to enhance income return to mitigate negative effects from rate moves, while adding portfolio diversification.

Source: Strategic Asset Alliance, New England Asset Management. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of information cannot be guaranteed.