Nordea says US deficits are more likely to widen than stabilize, lifting long-run yields

Nordea traces most of the recent climb in long-term government yields to higher real interest rates rather than to investors pricing in a solvency problem. The mechanism it cites is competition for capital: heavy federal borrowing is drawing on the same pool of savings that is financing a buildout of data centres. The term premium — the extra yield investors demand for holding a long-dated bond instead of repeatedly rolling short-term debt — has stayed broadly stable, which is why the debt trajectory has not yet become a market-wide stress point. Growth has done the heavy lifting, keeping debt as a share of the economy from spiralling despite sizeable deficits.

The central challenge to official projections is arithmetic. Nordea argues the Congressional Budget Office's assumed interest rates sit below what the market currently prices, and that if market rates prevail, deficits would run roughly 1 percentage point higher. Spending assumptions look light as well: demographic trends suggest outlays on Medicaid, Medicare and pensions could exceed forecasts by several percentage points.

Political remedies look unlikely to close the gap on the note's reading. After the midterms, Democrats could push to reverse Medicaid cuts and raise taxes on higher earners, but a presidential veto could block that, and Nordea finds little historical evidence of politicians delivering lasting fiscal consolidation.

The conclusion is conditional rather than a crisis call. A recession would sharply accelerate the deterioration and put debt sustainability in question. Even without one, Nordea argues higher term premiums become increasingly likely over time, which would in turn reinforce a weaker dollar over the longer run — particularly once Europe's own fiscal and political difficulties have eased. The pivot point is growth: the balance holds while it stays strong and erodes if it slows or deficits widen further.