Head of Investment Management and Strategy explains how sovereign debt overhang could extend beyond US spending
The United States Congress recently passed President Trump’s “One Big Beautiful Bill” adding a projected $3 trillion to US budget deficits over the next decade largely through tax cuts to high earners and risking a bond market backlash that could drive US treasury yields higher. While the particulars of US debt and the circus around Presidential trade policy could all come with implications for investors and advisors, one investment expert puts these US trends in the wider context of global sovereign debt levels and notes that we may be seeing a structural trend that advisors need to stay aware of.
Chris McHaney, Head of Investment Management and Strategy at Global X Canada, explained that high global sovereign debt levels in the second half of 2025 could put investors squarely back into the paradigm they faced in 2022, when the negative correlation between stocks and bonds became positive and losses on the equity side of portfolios were amplified, rather than offset, by bond performance.
“When equities fell, bonds were supposed to help you, but in 2022 they didn’t and everyone felt that. Earlier this year, in April, that actually happened again.” McHaney says. “Now the market has to figure out if the long bond is still a hedge against equities or if we have moved into a new environment where we need to count on other things to provide that negative correlation benefit.”
While the argument could be made that both the 2022 period of positive correlation and the small blip witnessed in April are simply products of secular events — such as post-covid inflation or the onset of a new trade war. McHaney notes, however, that we are beginning to see this positive correlation trend in countries beyond the United States. British and Japanese long bonds, he notes, have seen their yields rise in recent months as investors seek compensation for the growing risk of markets flooded by sovereign debt issuances.
While central banks might be looked to as a means of offsetting this issue through quantitative easing, McHaney notes that many central banks lack the capacity to control the performance of long bonds via QE. Moreover, given signals from many current central bank leaders, there may not be the willingness to pursue such a policy.
Despite the risks brought on by US deficits tied to the “Big Beautiful Bill” bond market responses have so far been somewhat muted. The so-called “bond vigilantes” have not yet punished the US President the way they did Liz Truss after her disastrous budget in 2022. McHaney notes, however, that the latent impacts of this bill on US debt means that the market reaction may prove more gradual as more and more impacts are revealed.
This can also be taken in the context of eroding US equity exceptionalism. Foreign and even some domestic institutional capital has been shown to prefer non-US markets for marginal purchases or profit reallocations so far this year. That change, as well as a structural shift in government bonds, may change the investment paradigm advisors operate in.
“Investing has kind of been on easy mode over the last ten years, where you just buy the US index, hold it, don’t worry about currency hedging. Yields were largely going in one direction as well, so even if you were in fixed income you got more than your coupon,” McHaney says. “I think it’s going to make building portfolios a little bit harder than it was in the past ten years.”
If bonds fail to provide their traditional diversification benefits, McHaney says that investors may want to look more closely at their equity allocations to find non-correlated returns within that sleeve. He notes that there is still merit in fixed income, highlighting these issues as largely isolated to the long end of the curve. Shorter-term bonds can give real yields, which he notes are now above headline inflation. Corporate bonds could also help add value for lower-risk investors, though he notes that corporate bonds still tend to be more correlated with equities.
For advisors staring down a tougher few months and years on the market, with some of the textbook investment rules being reconsidered, McHaney argues that broad diversification can and should help them navigate.
“We don't know which sectors will outperform, we don't know which regions will potentially outperform. Going into the end of 2024 everyone was talking about how horrible Europe was going to be because Trump was coming in, and he was going to be an isolationist, and Europe would be alone to deal with Ukraine in the war. In the first half of 2025 European and international equities have performed extremely well,” McHaney says. “We don't know how things will unfold. And so it does come back to mixing in different types of equities into that equity side of your portfolio and mixing in different types of fixed income as well. Add some corporates in there, if you need a little bit of pickup, and make sure you're not all in one part of the curve.”
