BlackRock warns U.S. debt could weaken Treasury and dollar appeal

Investing.com -- BlackRock (NYSE:BLK) warned on Monday that the growing U.S. government debt might reduce investor interest in long-dated Treasuries and the dollar, making a case for looking at investment opportunities outside U.S. borders.

The world’s largest asset manager noted in its third-quarter fixed income outlook that President Donald Trump’s tariffs have created market volatility this year and raised questions about the dollar’s reserve currency status. While fears of de-dollarization are considered extreme, BlackRock’s fixed income executives stated that increasing government debt could heighten this risk.

"We’ve been highlighting the precarious position of the U.S. government’s indebtedness for some time now, and, if left unchecked, we view debt as the single greatest risk to the ’special status’ of the U.S. in financial markets," the executives wrote.

Congress is currently debating a tax and spending bill that forms a crucial part of Trump’s economic agenda. Non-partisan analysts project this legislation would add up to $5 trillion over the next decade to the federal government’s debt, which already exceeds $36 trillion.

BlackRock pointed out that higher government debt could disrupt the typical correlation between long-dated Treasury yields and U.S. monetary policy. This might result in yields rising even as the Federal Reserve cuts interest rates. The asset manager explained that increased supply of U.S. government debt will likely face reduced demand from both the Federal Reserve and foreign central banks.

Based on these concerns, BlackRock recommended diversifying beyond the U.S. government bond market and increasing exposure to short-dated U.S. Treasuries, which could benefit from interest rate cuts.

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"Despite proposed spending cuts, deficits are still climbing - and more of that spending is now going toward interest payments," BlackRock’s investment managers said.

They added, "With foreign investors stepping back and the government issuing more than half a trillion dollars of debt weekly, the risk of private markets being unable to absorb this debt and consequently pushing government borrowing costs higher, is tangible."

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