U.S. could face ‘Liz Truss moment’ without action on debt mountain

U.S. 10-year Treasury yields, which are a benchmark for longer-term borrowing, could rise above 5% in 2025 from around 4.4% currently, if the incoming administration prioritizes tax cuts and uses tariffs to offset lost revenues, Jerome Jean Haegeli said in an interview.

“I don’t exclude next year that the U.S. is going to have a Liz Truss moment for Treasurys" he said, referring to the British prime minister who resigned in 2022 after financial markets reacted negatively to the announcement of big tax cuts.

At the time, U.K. government borrowing costs jumped, the pound sank to a record low against the U.S. dollar and the Bank of England was forced to intervene to stabilize the market for government bonds.

Economists have long worried that mounting debts could push up interest rates and threaten the U.S. government’s ability to borrow large sums during a major crisis, as it did during the Covid-19 pandemic. But others argue that the U.S. likely has a greater capacity to sell its debts than most countries, since the dollar is the world’s reserve currency, and its government bonds have long been considered among the world’s safest investments.

Swiss Re has $22.76 billion in U.S. Treasury bonds, according to its third-quarter results announced earlier in November. Higher interest rates on government bonds are typically positive for insurers’ earnings, Haegeli said.

The U.S. federal government’s budget deficit is expected to reach 6% of annual economic output this year, as high in percentage terms as reached in the pandemic or the 2008 financial crisis.

President-elect Donald Trump’s policy proposals could push the fiscal deficit up to between 7% and 12% of gross domestic product, Haegeli said, using Swiss Re calculations.

“And that’s not sustainable," he said.

While keeping a lid on government debt had long been a concern for U.S. lawmakers of all political stripes, that focus waned during Trump’s first term.

According to the U.S. Office of Management and Budget, government debt was 76% of economic output at the end of 2016, and stood at 95% of economic output in the second quarter of this year. At the end of 2000, it was 32.7%.

Concerns about the size of the U.S. government’s debt pile had been growing even before Trump’s election victory earlier this month. Even if Kamala Harris had won the presidency, the trajectory of the government deficit would have worsened, according to the Committee for a Responsible Federal Budget, a nonpartisan group that advocates for smaller deficits.

Federal Reserve Chair Jerome Powell has said that borrowing is “unsustainable" at its current pace, while the European Central Bank on Wednesday expressed worries about the threat of “spillover effects" to eurozone financial markets “given persistent U.S. debt sustainability concerns."

However, many economists see a steady but gradual rise in borrowing costs as a more likely outcome than a more dramatic, destabilizing jump.

“It is unlikely that we will get a debt crisis," said Torsten Slok, chief economist at Apollo Global Management.

Any boom in economic activity prompted via tax cuts and increased tariffs at the start of Trump’s presidency would be followed by a “fiscal bust" should some of the policies not be retracted, Haegeli said.

Trump has proposed imposing tariffs of up to 20% on all goods imports and as much as 60% on Chinese products, which could raise about $2.8 trillion over 10 years, according to the Tax Policy Center research group.

But while tax cuts could cause the economy to overheat and risk inflation rising somewhat, the U.S. should still avoid a repeat of the skyrocketing inflation that followed the pandemic and the global energy shock that came after Russia’s full-scale invasion of Ukraine.

Only “multiple negative shocks" and a consequential loss of investor confidence would cause a level of disruption that would force inflation to spiral, Haegeli said.

However, the outlook remains uncertain, given the lack of clarity on the incoming administration’s plans and whether Congress would approve them. Ultimately, it could be pushback from investors that limits the likelihood of such a tumultuous scenario playing out, Haegeli said.

Write to Ed Frankl at edward.frankl@wsj.com