Scenario Analysis: How Could Soaring US Debt Impact Markets?
- Historical precedent shows that soaring sovereign debt raises the risk of higher yields or higher inflation.
- We provide three scenarios for multi-asset-class investors to assess portfolio implications of the U.S. government’s widening fiscal deficit.
- A global multi-asset-class portfolio could lose 14% under a rising-yield scenario and 8% under a politicized Federal Reserve — although foreign investors could lose up to 18% due to USD weakness.
The growing U.S. debt burden raises two distinct risks for investors. First, bond buyers might demand higher yields.1 Second, a lack of fiscal control could force the Federal Reserve to expand the money supply to cover the shortfall, fueling inflation.2 We looked at historical parallels for three potential outcomes: Greece’s default‑risk spiral (2010‑12), Turkey’s crisis of politicized monetary policy (2018‑23) and Spain’s budget discipline after the country’s sovereign-debt crisis (2012‑14). Under our U.S. scenarios — guided by these precedents — a hypothetical multi-asset-class portfolio could drop 14% under a rising-yields scenario, while it could lose 8% under the politicized-Fed scenario and gain 4% under the fiscal-discipline scenario.
Insights from historical debt crises
The chart below illustrates three historical precedents on how debt stress can unfold: rising yields, a politicized central bank or credible fiscal discipline that resolves the pressure.
Greece during the EU sovereign-debt crisis supplies the example for rising yields. When larger-than-forecast deficits were revealed in late 2009, yields began climbing — especially at shorter maturities — as investors priced in default risk. On April 23, 2010, Greece formally requested EU-International Monetary Fund aid, marking the start of successive bailouts. With no ability to devalue or print euros, funding costs could adjust only through rising rates. The peak of the repricing was in early 2012, when the 10-year yield surged above 35%.
Turkey illustrates the example for a politicized central bank. From May 14, 2018, when President Recep Tayyip Erdoğan vowed tighter control over the central bank, monetary policy increasingly turned unorthodox. The central bank, under political influence, pursued policy-rate cuts — even as other countries raised rates to contain pandemic-induced inflation. The result was runaway inflation and steep depreciation of the Turkish lira. Stability only began to return after June 3, 2023, when a new treasury minister and central-bank governor reinstated orthodox monetary policy.
Spain provides the example for credible fiscal discipline. From June 9, 2012, when it requested a banking-sector bailout from the eurogroup, to Jan. 23, 2014, when it formally exited the program, Spain pursued strict deficit targets and banking-sector reforms. Subsequently, Spanish yields declined and — as short-term funding markets reopened — Spanish equities rallied.
Periods used: Greece: April 23, 2010 (EU-IMF aid request) – July 25, 2012 (ECB pledges to preserve the euro); Turkey: May 14, 2018 (Erdoğan vows tighter grip on the central bank) – June 3, 2023 (return to orthodox policy under new treasury minister and central-bank governor); Spain: June 9, 2012 (bank-bailout request to eurogroup) – Jan. 23, 2014 (formal exit from bailout). Source: MSCI, Reuters, World Bank
Scenarios for the US
Unlike Greece, Turkey and Spain, the U.S. borrows in the world’s reserve currency, can rely on the depth and collateral role of the Treasury market and — unlike Greece and Spain — issues debt in its own currency. These advantages mean that the U.S. scenarios may play out differently, but the U.S. is not immune to the pressures that have affected other countries in similar circumstances.
Under our hypothetical rising-yields scenario, bond investors question the Treasury Department’s ability to repay on time and demand an increased credit risk premium, driving yields sharply higher. A flight away from U.S. assets could lead to the U.S. dollar’s weakening against other safe-haven currencies and equity losses echoing the 2011 debt-ceiling crisis.
Our politicized-Fed narrative, on the other hand, assumes Congress finances persistent deficits with debt while the central bank engages in quantitative easing, expanding the money supply and lifting inflation expectations while the dollar weakens. Nominal equities may fall less than in the rising-yields scenario, but inflation also reduces their real return.
Finally, the fiscal-discipline scenario assumes a phased rollback of pandemic programs and shrinking debt levels. As investor confidence returns, equities rise. With the U.S.’s safe-haven status maintained, both credit risk and term premium compress, so rates decrease. The U.S. dollar appreciates, while inflation stays on its baseline track.
Impact on multi-asset-class portfolios
To assess the scenarios’ impact on multi-asset-class portfolios, we used MSCI’s predictive stress-testing framework and applied the shocks from the table below to a hypothetical portfolio consisting of global equities, U.S. bonds and U.S. real estate.3
Our scenario assumptions
Assumptions about risk-factor shocks are informed by historical analysis and judgment. Breakeven inflation (BEI) is measured in basis points (bps).
Rising yields could reduce the value of a diversified global portfolio by 14%. The scenario of a politicized Fed would shave 8% from a USD portfolio in nominal terms — even more in real terms once inflation is considered — and up to 18% for non-USD-based investors, reflecting currency weakness. By contrast, credible fiscal discipline could lead to a 4% gain.
Portfolio impact as of Sept. 1, 2025. Source: S&P Global Market Intelligence, MSCI
As the world’s reserve currency, the dollar affords the U.S. more time and flexibility to finance deficits than other countries. Yet history shows that a rising debt burden often runs into limits, and when it does, rising yields or rising inflation could weigh on portfolios.
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1 Joachim Klement, “US fiscal folly could create big, beautiful debt spiral,” Reuters, July 4, 2025.
2 Mike Dolan, “Shrieks and shrugs meet alarming US debt pile,” Reuters, June 23, 2025.
3 The results are generated by using model correlations to propagate shocks to the portfolios, using MSCI's BarraOne®. MSCI clients can download the correlated BarraOne stress test and RiskMetrics® RiskManager® stress test. Treasury inflation-protected securities (TIPS) are represented by the iBoxx TIPS Inflation-Linked Index provided by S&P Dow Jones Indices. U.S. Treasurys, equities and corporate bonds are represented by MSCI indexes. Private equity is represented by model portfolios. U.S. real estate is represented by the MSCI/PREA U.S. AFOE Quarterly Property Fund Index. The composite portfolio is 50% global equities (35% public and 15% private), 24% U.S. Treasurys, 2% TIPS, 12% U.S. investment-grade bonds, 2% U.S. high-yield bonds and 10% U.S. real estate.
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