The recent turmoil in French bond markets serves as a stark reminder for the United States about the unpredictable nature of debt sustainability tipping points. As French yields spiked in response to fiscal concerns, it underscored the potential for bond vigilantes to abruptly check government spending habits. In the U.S., despite rising fiscal deficits, bond markets have remained calm, largely focusing on the Federal Reserve’s rate outlook and the broader economic picture. However, financial executives and investors are increasingly vocal about the growing U.S. debt, suggesting that a market-driven wake-up call might not be far off.
The upcoming presidential debate between Joe Biden and Donald Trump could mark a significant shift in market sentiment, as policy discussions on fiscal deficits come to the fore. One senior financial executive noted that investors might start paying more attention to these discussions post-debate, potentially triggering a market response. If bond investors begin to question debt sustainability, yields could rise, complicating the Fed’s efforts to ease the economy into a soft landing. Recent events in France, where market disruptions affected government funding plans and even delayed an IPO, highlight the potential consequences of such a market shift in the U.S.