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IF THE NAME LIZ TRUSS sounds vaguely familiar, there’s a reason: Truss was once the prime minister of the U.K.—but for just 45 days.
How did Truss lose public confidence so quickly? The bond market forced her out. Shortly after taking office in the fall of 2022, Truss proposed substantial tax cuts for both corporations and individuals. That would have been a popular move, except that her budget didn’t include any offsetting spending cuts.
This spooked investors who worried about Britain’s debt load. Markets immediately responded: The pound sank to a 37-year low, and bond yields jumped more than 1.5 percentage points in the space of a few days. With that, Truss was out.
There’s the notion that governments can never actually run out of money, because they have the power of the printing press. Modern Monetary Theory argues that deficits don’t matter—that large economies like the U.S. and the U.K. can, more or less, spend freely.
Liz Truss’s experience is a testament to the fallacy of that theory. As early as ancient Rome, there’s been evidence that deficits eventually do matter. But Truss’s story isn’t well known in the U.S. Why? I believe the reason is that we tend to view ourselves in a different economic category. Because the U.S. economy is so large, there’s the perception that we have limitless resources and the crisis that hit the U.K. is a crisis that would only happen elsewhere.
Since public spending ballooned during the pandemic, this seemingly impermeable facade has begun to show cracks. Budget deficits that used to be measured in billions are now in the trillions. Today’s federal government spends approximately $7 trillion a year and collects only about $5 trillion in revenue. Congress is now debating a new tax bill that would add to the annual shortfall.
Nonetheless, there was a surprise eight days ago when the rating agency Moody’s announced it would downgrade U.S. Treasury bonds, stripping them of their triple-A status.
Moody’s blamed this decision on both political parties and on both ends of Pennsylvania Avenue. The downgrade, the rating agency wrote, “reflects the increase over more than a decade in government debt and interest payment ratios….”
Moody’s continued: “Successive U.S. administrations and Congress have failed to agree on measures to reverse the trend of large annual fiscal deficits and growing interest costs…. As deficits and debt have grown, and interest rates have risen, interest payments on government debt have increased markedly.”
Unless changes are made, Moody’s wrote, “federal interest payments are likely to absorb around 30% of revenue by 2035, up from about 18% in 2024 and 9% in 2021.”
These numbers are certainly alarming, and there’s no easy way to explain them away. To some degree, Moody’s action was indeed a lagging indicator. As one Bloomberg headline put it: “Moody’s Tells Us What We Already Know About U.S. Debt.”
There’s been concern for more than a decade over lawmakers’ ability to manage the budget responsibly. Back in 2011, Standard & Poor’s was the first to downgrade U.S. Treasury debt. In 2023, Fitch, another rating agency, took away its own triple-A rating. Concern has been building, and it now seems to have reached a tipping point. While not as severe as that which hit Liz Truss’s government, the dynamic has hit the radar here. We can see that in the trajectory of interest rates.
Late last year, the Federal Reserve lowered its benchmark federal funds rate three times. Yet rates on longer-term debt—which are determined by the market—have gone up, not down. While the Fed has dropped short-term rates by a total of one percentage point, from 5.5% to 4.5%, market rates have risen by a percentage point. Last fall, the yield on the 30-year Treasury bond was around 4%. This week, after the Moody’s announcement, it reached 5%.
Market rates typically follow the Fed’s lead. But in this case, investors are communicating—in no uncertain terms—their worries about fiscal mismanagement in Washington and, by extension, the riskiness of federal debt. Investors are no longer willing to buy bonds at the same low rates as before.
What does this mean, and how concerned should we be? While there are no clear answers, we can make several observations:
1. The importance of bond yields. Compared to the stock market, the bond market might seem dull. But its importance to public policy is far more significant because of the direct connection between bond rates and the federal budget. Today, the federal government’s outstanding debt totals about $36 trillion. If it were forced to pay even 1% more to nervous lenders, it would bump up federal spending by another $360 billion a year. For that reason, while it seems somewhat arcane, the bond market is worth watching.
2. Whether to lose sleep. Some commentators ask whether the Trump administration might try to “renegotiate” government bonds as a way to cut the nation’s debt load—in other words, to pay bondholders less than 100 cents on the dollar. While the president has alluded to this idea before, I believe it’s unlikely because economic history has shown that borrowers who default have a very hard time borrowing again. Despite the concerns about the federal budget—which are justified—I don’t believe investors should lose sleep over Treasury bonds.
3. Investors’ best defense. I don’t worry about the long-term viability of Treasury bonds. Still, it isn’t an easy situation. Wrangling in Congress could cause disruptions in the short term. My advice: Keep in mind what economist Harry Markowitz called “the only free lunch” in investing: diversification. Because it doesn’t cost anything, it’s worth reviewing your bond portfolio to see if any changes might be in order.
If you want to manage risk, you might include a mix of individual Treasury bonds of various maturities, along with positions in Treasury bond funds. Without adding too much more risk, you might also consider a short-term municipal bond fund. While municipalities do depend in part on the federal government, they’re largely independent, and that could make highly-rated municipal bonds a reasonable choice. Moving some cash into a certificate of deposit or a high-yield savings account—within FDIC limits—could also help spread the risk.
4. Keep risk in perspective. There are 21 levels on Moody’s rating scale. Although U.S. Treasurys have been moved down one notch, they’re still very close to the top. Moody’s message: U.S. Treasury bonds used to carry virtually no risk, but now they carry a very tiny level of risk. For that reason, as the old saying goes, I’d be wary of going from the frying pan into the fire. Steer clear of financial salespeople hawking alternatives, such as cryptocurrency, commodities or private debt funds, which may carry far more risk.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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This was an excellent, and enlightening article but the comments were especially excellent. I would like to recommend a suggestion. In order to follow comments more succinctly, would it be possible to add a button to the newest and most voted options called latest or oldest. That way we would be able to read the comment and access all of the replies to that comment in the proper order. Thank you for your consideration.
Great topic and article Adam.
“Steer clear of financial salespeople hawking alternatives, such as cryptocurrency, commodities or private debt funds, which may carry far more risk.”
I’m with you on the crypto and commodities, but private credit? Does it really carry far more risk than the US Aggregate Bond Index?
Isn’t private credit, if not immune, at least less sensitive to fluctuations in interest rates and other volatility we’ve seen this year?
What I’m (vaguely) familiar with in private credit seems like floating rate high yield bonds. I realize you and Jonathan both prefer to take risk with stocks and play it safe with bonds, but private credit doesn’t seem like such a huge step out on the risk spectrum.
Btw I realize there are other downsides to private credit, illiquidity chief among them. I’m just trying to better understand the risk comment.
One significant risk of private credit is it typically suffers decent defaults (ie Bankruptcy) during economic downturns. Your capital is gone. Blue chip stock and investment grade rated bonds take a hit but keep on ticking. Investors permanently lost capital during the great recession in private credit. You want to invest in private credit coming out of a downturn when you can clearly determine who survived.
Thanks for the comment.
.
So much concern and diversion in these comments coming from the ol stock/bond investment conundrum.
I’ve got a little different approach as my Schwab account is so very sparse.Rather, my legacy is in rental homes, paid off and producing quite reliable income for a trust to pass on.
Paid for means a lot of freedom and less angst in an investment. If the proverbial fan get to splattering, I have options of lowering the rent to a manageable amount for my people to…manage and still have money for taxes and insurance. I don’t have to make a profit for a while you see.
Now, I learned something during COVID when folks lost their jobs and of course in danger of loosing their housing. When I had a call from a tenant, I assured him I could let him skip a payment of two and not loose his home. Then, of course came the stimulus checks… and most folks used the money to be rent paid up.
One though, made different decisions and spent the windfall unwisely. They were the only ones to fall behind so they had to leave after the lease was not renewed. They were several months behind in rent, but had applied to the state for financial help.
The result was about 2 months later the manager got a big ol check from the government and we all got paid and the tenants got their deposit back.
I realized after thinking about it, that the big business housing lobbyists had gotten the taxpayers to pay my tenants back rent.
Re: Deficits. Yes, there are limits. As for Moody’s I do wonder why downgrade now, and I think I know. What aspect of government spending has really changed since 2020?
The editorial board at the WSJ noted on May 21 that “This isn’t a financial crisis, and most of these jumps in [bond] yield remain modest.”
Wealth defense is always a prudent strategy for investors. I don’t think obsessing about the downgrade is helpful or good for my mental health. Stocks remain expensive, as Jonathan stated on 5/21. We may be more susceptible to a correction stimulated by emotions rather than metrics.
Some might even be in the mood to say “there is no safe haven!”
It does seem we have moved from greed to fear, but the CBOE Market Volatility Index VIX has recovered. As tariffs went into effect the VIX spiked up to 52.33 on April 7 as people started to sell off stocks. It closed at 20.32 on Friday. In the past 12 months the low was about 12.09. The current fear index is much closer to the recent low than the recent high.
Perhaps most interesting is Buffett, who has steered BRK to a 70/30 portfolio. I don’t know what, if any changes he has made since “Liberation Day”. I’ve used his overall approach as an affirmation of the high valuation of the market and the benefits of cash and bonds at this time.
However, a choice to sit on the sidelines incurs opportunity risk and creates another issue. “When is it safe to enter the stock market?” I’d suggest if one is attempting to avoid any market downturn, ever, then there will never be a safe time to buy stocks.
This is truly a fascinating topic and one that requires some real consideration amongst those of us who are considering retirement or are recently retired. I have long thought about the contradiction between the need for long term thinking in one’s personal financial planning while our system of government only allows for short term thinking. The ultimate goal of seeking re-election every few years does seem to lead to short term thinking and kicking the can down the road. Reverting to policies that will reduce spending, balance the budget and shrink or eliminate the deficit almost seem impossible in this political environment. But sustaining a $2T annual deficit seems equally improbable and could result in a significant global financial event. This feels like one of those times when ignorance is bliss for those who are just living their lives and not thinking long and hard about the frightening future that may very well lie ahead.
I will take the risk, here is my status, 85% S&P and 15% cash to carry you over when the market tanks, and it will over a long span. I am not there yet but what Buffett thinks does matter, his suggestions were 90% S&P and 10% treasuries. I like liquidity, and with VMFXX at 4.2%, or my bank at 3.7% is adequate for me, I feel secure. My investment horizon so far has been 60 years and it took me 50 years to get here.
Adam, thanks for this and it is very concerning.
You say: Moving some cash into a certificate of deposit or a high-yield savings account—within FDIC limits—could also help spread the risk.
How do you see the risk level of money market funds which don’t enjoy FDIC protection?
There once was a saying “a million here, a million there, and pretty soon you are talking about real money.” It is often credited to Sen. Everett Dirksen, but apparently others said it before him. Then we moved into “a billion here, a billion there, and pretty soon you are talking about real money.” Now, we are entering the era of “a trillion here, and a trillion there, etc. etc.” I think we are now truly, truly talking about real money.
Great article.
How do we buy foreign bonds directly? Such as Germany’s?
Why is FDIC insurance any more secure than Treasuries? It could go away with the wave of a Sharpie.
I like a well diversified short CDs ladder now because it directly diversifies my cash away from government risk. I’ll take some JP Morgan risk vs all my short term eggs in treasuries. A little of a lot at 4.00% to 4.50%. When I started in banking one of my 1st commercial clients was a wholesale plumber. He kept $200k in a short term diversified CD ladder for emergencies. Why? He told me you can’t trust the government or the stock market 100% of the time. It stuck with me.
I’d be curious to hear more about foreign developed market bonds as well.
Vanguard’s BNDX might be the easiest and least costly way to invest in ex-US bonds. But yields are currently lower and there’s added currency exchange rate risk vs holding Treasurys or BND.
Thanks David. Fidelity has one too (FBIIX) but unlike Vanguard fund doesn’t cap its China exposure, which is sizable.
Eliminating FDIC requires an act of Congress. It would be economic suicide which makes the recent tariff turbulence look like a calm summer breeze.
Adam, what sort of average duration target do you aim for today in a diversified bond portfolio? How do you think about that over time as rates change?
I took ours way down when the duration premium evaporated so it wasn’t walloped when yields rose. When yields hit something closer to modern averages I increased duration to hedge income risk. The outlook today is far more complex.
Where are you Calvin Coolidge?
Thank you Matt for your post. It motivated me to watch a documentary on Calvin Coolidge so that I could better understand the reference. Indeed lowering taxes and reducing the deficit was central to Coolidge’s economic policies which seemingly fueled the Roaring 20’s. He also rather surprisingly declined to seek reelection in 1928 right before the Great Depression set in. Interesting history no doubt!
Excellent advice, Mr. Grossman, especially your last sentence!
Also good to note is that unlike in a parliamentary system, where a PM with really bad ideas can be removed quickly, in our system, given a cowed Congress and a sycophant Cabinet, we’re guaranteed a wild ride with the mad mercurial king for four years. That, however, as they say over where the king is a King, is all the more reason to “keep calm and carry on.”
Has it only been 4 months? It already feels like 4 years.
Please pardon me for an extended post but Adam’s good article reminded me of something my father wrote in the company newsletter in 1982. He would be impressed that we made it this far.
PERSPECTIVE ’82
In my forty-one years in this business, I have never seen anything like it. What am I talking about? Everything! I have never seen anything like everything. Perhaps that’s why we are all so shaken and apprehensive. Thinking people generally agreed last year that our Nation was economically on the road to the never, never land. For years we had been consuming more than we produced and spending more than we earned. This course had reflected itself in tremendous additional debt and huge deficits in foreign trade, especially in oil. Imagine the price of oil rising from about $3 a barrel to over $30 a barrel from ’71 through ’80 with our foreign oil bill jumping from $3 billion a year to $60 billion. How do you like the idea of paying the value of a State, such as Iowa, to overseas oil merchants each year?
You cannot escape the fact that government, business or people will eventually go bankrupt if spending consistently exceeds income. Ten years ago, the National debt was around $400 billion. Just recently it passed $1 trillion. How do you interpret that? The U. S. Treasury’s need for $36 billion in the last quarter of this year and an additional $30 billion in the first quarter of 1982 is obvious testimony to years of accumulated “built-in” programs and deficit spending.
Why is it the great minds of our times are unable to analyze our dilemma with some degree of unity. Isn’t it true that lack of appropriate control now simply borrows from the quality and enjoyment of future life. What have you done for your grandchildren lately? Can economic irresponsibility be enjoyed forever or must it ultimately be repaid through increased taxes, high inflation or a lower standard of living? Could it be said that without correction we simply delay the day of reckoning. With correction, certainly, there will be sacrifice and pain. The catch to all of this of course is, do the American people and their elected political leaders agree that there is no quick fix to our protracted dilemma and are we willing to endure the pain for the time necessary for correction. Or shall we simply face up to the fact that we are incapable of more than a temporary inconvenience and a quick fix is all we are willing to accept right now. We will know as we move through 1982, an important election year. To say it another way, we know we have great numbers of grasshoppers. How many ants are left?
But that is the catch 22 isn’t it?
Was your dad right in 82?
I find that very hard to answer.
For me it feels like the guy that every year says the stock market is going to crash and then when it finally does thinks he smart
Markovitz and diversification are not accurate.
During 01/2000 to 01/2010, 10 years, the SP500 lost close to 10% while Value, Small Cap and international made money.
During 2010-2024 SP500 made a lot more than Value and international.
What is Buffett best idea? Invest only in the SP500 for decades.
It sounds like your come from your comment that you are saying there should be no debt at all. I think this article was specifically about bonds and thus the comment was diversification within that investment class. I’m a Master Sommelier, but I have degrees in finance and economics and so in my education, diversification means both among investment classes, and then potentially, within a class for that subset of the portfolio. I could be misinterpreting, but it sounds like you were saying just have the SP 500 in your portfolioand skip debt as a class. although I read more wine and agriculture literature than finance literature, these days, I haven’t heard that.
I didn’t explain myself well. I was just discussing stocks.
Diversification sounds great; the devil is in the details.
Do I need to own LC stocks, value, blend, and growth?
Do I need to do the same with small and midcap?
Is income investing a must?
What about international, REITs, gold, and alt categories?
Same with bonds. How many categories do I need, and does diversification really help?
When you are a cumulator, you should own mostly stocks, which is what I have done. When you get closer to retirement, start using bonds.
Markovitz risk/return is far from accurate. If you select a certain portfolio now based on the past, the future of returns and risk/SD aren’t a guarantee.
My
I didn’t follow the buy and hold and diversification. I have been using the market to tell me where the best categories are and it has been pretty good. This is why I mentioned 2000-10 + 2010-24.
My specialty is bond OEFs. While the US Tot bond index, BND, sounds like a good index, it has been dismal in the last 5 years.
See https://schrts.co/AkXhIigg
I do believe a “Liz Truss” moment is possible here. In other words, we wake up one day and no one wants to buy our bonds, the Fed has to step in to keep the market liquid, stocks fall precipitously, and we have a huge mess on our hands when we realize we’ll have to pay a lot more in interest, going forward, than we had hoped. Simply put, I believe Congress will not get our fiscal house in order unless the markets to enforce the necessary discipline–and that might get very ugly. In the meantime, I expect the government’s only recourse is to try to inflate our way out of the mess. Here’s a question. Why are gold and bitcoin continuing to rise in this environment? Are they trying to tell us something?
I am very, very concerned about the foolishness of the Republicans and their tax cuts (and I always vote Republican because I thought we were the party of values and responsibility!). When they cut taxes in 2017 I didn’t need the tax cut, and I don’t need it now. No one should even be thinking about tax cuts until there is a budget surplus. Just as I am on the cusp of retiring, I’m very concerned that the fools in Washington are going to wreck my portfolio. Unbelievable!
Are you worry now more than several of years ago when inflation was the highest in 4 decades?
Is the bond market scarier now than 2022 which was one of the worst years in decades?
Did you know that in the first 3 years of Trump in his first term until COVID hit, workers adjusted inflation earnings went up more than 10% first time in several decades. In that time hundreds of economists, including Nobel prizes told us the worst is going to happen.
https://fred.stlouisfed.org/series/LES1252881600Q
https://www.politico.com/story/2016/11/krugman-trump-global-recession-2016-231055
In 2025, inflation is down from 3% to 2.3%.
New investments in the US. Even if just 30% will be done it’s still huge. These will thousands of jobs in the private sectorm
https://www.whitehouse.gov/articles/2025/05/trump-effect-a-running-list-of-new-u-s-investment-in-president-trumps-second-term/
Am I the only one to find it odd that a post that points out positives about the current administration gets 11 down votes?
For a site that is supposed to refrain from political comments, they certainly manage to sneak their way in, particularly when the comments are negative and smacking of TDS.
“first 3 years of Trump in his first term until COVID hit, workers adjusted inflation earnings went up more than 10% first time in several decades.”
Uh, no: Per that 1st link – Employed full time: Median usual weekly real earnings
Q4 ’16: $349
Q1 ’20: $367 + $18 = 5%
Q4 ’12: $323
Q1 ’16: $346 + $23 = 7%
The big spike you see in chart is from
Q2 ’20 – AFTER Covid
There’s are big pieces missing from our discussions. Culture and regulation.
Markets have worked well for us. Mutual funds, our ability to trade safely, the entire retirement system, are based on regulations. These regulations have changed slowly and been tweaked by different administrations, but they have been a constant. They are now threatened. Many are already gone.
Secondly, the way immigrants are being treated is going to harm the economy. Naturalized citizens and green card holders I’ve known for years, many who I consider Americans, are justifiably scared. Any corporation with immigrant employees has to rethink its hiring and retention. Any claim that Americans are prepared to step into these jobs is pure fantasy, not to mention the question of what happens when proven dedicated workers stop contributing to the economy.
You believe in this administration? Wow
Yes…and so does over 51% of the nation. Amazing, isn’t it.
Lots of blame to go around on this. The Democrats always have plenty of pet projects and pork for their home district to blow any budget open, no matter how much is budgeted. And there are not enough rich people to pay for all their schemes. And yes the Republicans are also irresponsible on spending. More important to all the politicians than the well being of the country is getting re-elected.