Why Government Deficits Matter More Than You Think

The U.S. government is running large deficits again, and unlike past cycles, they’re arriving during a period of relatively stable growth and low unemployment.

That combination is unusual.

Deficits typically widen during recessions. This time, they’re elevated even without one.

Markets are paying attention — quietly.

The Big Idea

Persistent government deficits change the supply-and-demand dynamics for capital, and that has real implications for interest rates, asset prices, and risk.

1. Where the Numbers Stand

Federal deficits remain historically large heading into 2026, driven by higher interest costs, entitlement spending, and ongoing fiscal commitments.

According to recent estimates:

• Annual deficits are running well above $1 trillion
• Interest expense is one of the fastest-growing line items
• Treasury issuance remains elevated to fund ongoing spending

According to the Congressional Budget Office and U.S. Treasury, this isn’t about short-term stimulus. It’s structural.

2. Why Markets Care About Deficits

Deficits matter because they increase the supply of government debt.

More supply means:

• The Treasury must attract buyers
• Yields stay higher than they otherwise would
• Capital competes between public and private borrowers

When deficits persist, rates don’t need to spike — they just need to stay elevated longer. That affects valuations, borrowing costs, and asset allocation decisions…

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This is one reason long-term rates haven’t fallen as quickly as some expected, even as policy has eased.

3. The Market Angle

High deficits don’t automatically cause market stress.

But they do tilt the playing field.

They tend to:

• Favor companies with strong balance sheets
• Pressure highly leveraged borrowers
• Keep a floor under long-term yields
• Increase sensitivity to inflation surprises

Markets adapt — but they don’t ignore the math.

Quick Hits

• Deficits are large even without a recession
• Treasury issuance remains heavy
• Interest costs are rising structurally
• Long-term yields reflect supply as well as policy

What This Means for You

Think in terms of constraints, not catastrophes.

Expect long-term interest rates to stay more resistant to sharp declines. That matters when evaluating equity valuations and duration-sensitive assets.

Favor businesses that can fund growth internally rather than relying on cheap external capital.

Be cautious with investments that depend on falling long-term yields to work. The hurdle rate is higher in a deficit-heavy environment.

Keep an eye on inflation surprises. With heavy issuance, markets react faster to data that threatens purchasing power.

The takeaway: large deficits don’t break markets — but they do change the rules. Understanding that helps you position for reality, not assumptions.

To your success,

The Shortlysts Team

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