US Debt Crisis Risk Rises as Supreme Court Ruling Looms and Japan Shifts Investments
A potentially destabilizing scenario is brewing in global financial markets. According to Patrick Artus, Senior Economic Advisor to Ossiam, a Natixis Investment Managers subsidiary, a Supreme Court decision limiting the President’s ability to impose tariffs could inadvertently trigger a sovereign debt crisis in the United States. This isn’t a prediction of outright default, but a warning that diminished foreign demand for US debt, coupled with rising deficits, could send long-term interest rates soaring – and the timing couldn’t be worse.
The Tariff-Deficit Double Whammy
The core of the concern lies in the interplay between potential policy reversals and existing fiscal pressures. The US public deficit stood at 5.8% of GDP in 2025, but is projected to exceed 7% in 2026, fueled by increased spending and tax cuts outlined in recent legislation. If the Supreme Court restricts the President’s tariff authority and the proposed $270 billion in household aid ($2,000 per household) moves forward, the budget situation will deteriorate further. This creates a perfect storm of increased debt issuance at a time when demand for that debt may be waning.
Japan’s Pivoting Investments: A Critical Shift
The key to understanding the potential crisis isn’t just US fiscal policy, but the changing behavior of a major creditor: Japan. For years, Japanese investors have been significant purchasers of US and European government bonds. However, that trend is reversing. Rising interest rates in Japan – currently at 2.10% for the 10-year yield and 3.40% for the 30-year yield – coupled with a stabilizing yen-dollar exchange rate, are making Japanese bonds a more attractive investment option. This repatriation of capital poses a substantial risk to the US Treasury market.
The Impact on US Treasury Yields
While a full-blown US or European default remains unlikely, the anticipated decline in foreign demand for government bonds is almost certain to push long-term interest rates higher. This isn’t simply an academic concern; higher rates translate to increased borrowing costs for businesses and consumers, potentially stifling economic growth and exacerbating existing inflationary pressures. The ripple effects could be felt across the global economy.
Beyond the US: Risks for the Eurozone
The vulnerability isn’t limited to the United States. The Eurozone faces a similar predicament. Like the US, European nations have also benefited from consistent demand from Japanese investors. A shift of Japanese capital back to its domestic market will likely put upward pressure on Eurozone bond yields as well, potentially destabilizing economies already grappling with high debt levels and geopolitical uncertainty.
Understanding Sovereign Debt Dynamics
Sovereign debt crises aren’t always about a nation’s inability to repay its debts. Often, they stem from a loss of investor confidence, leading to a self-fulfilling prophecy of rising yields and diminished access to credit. The scenario outlined by Artus highlights the importance of maintaining investor trust and managing fiscal policy responsibly.
Navigating the Rising Rate Environment
The potential for higher interest rates and increased volatility in the bond market demands a proactive approach from investors. Diversification remains crucial, but it’s also important to consider the duration of bond portfolios. Shorter-duration bonds are less sensitive to interest rate changes than longer-duration bonds. Furthermore, exploring alternative asset classes, such as inflation-protected securities, could help mitigate risk. Understanding sovereign debt is paramount in this evolving landscape.
What are your predictions for the US Treasury market in 2026? Share your thoughts in the comments below!
