Chart of the Week

Just as tariffs, volatility, and questions around U.S. debt sustainability have risen, so have concerns around the threat of global investors moving away from U.S. financial assets. These fears are most acute in credit markets, with foreign investors being important buyers of both U.S. government and corporate debt.

However, the chart above indicates that other developed economies do not have the same capacity for investment as the U.S, with the total corporate and government debt securities of the U.S. far exceeding that of other G7 countries. Further, the U.S. is the only country not dwarfed by the value of gross global savings (the sum of public and private savings), suggesting that it is the only market with the depth, liquidity, and capacity for investors to deploy these funds.

We believe that the size of U.S. debt as percent of global debt makes a widespread move away from its financial assets highly unlikely. We currently favor U.S. fixed income over international as a result and see continued strength for the U.S. dollar. Even if debt sustainability issues were to further impact Treasury demand, the slack would likely be picked up by more fiscally responsible U.S. Investment Grade Corporate Securities, on which we are currently favorable.

¹ G7 = Group of Seven; countries include Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. High yield (junk) bonds have lower credit ratings and are subject to greater risk of default and greater principal risk. Although Treasuries are considered free from credit risk they are subject to other types of risks. These risks include interest rate risk, which may cause the underlying value of the bond to fluctuate. U.S. government securities are backed by the full faith and credit of the federal government as to payment of principal and interest. Unlike U.S. government securities, agency securities carry the implicit guarantee of the U.S. government but are not direct obligations. Payment of principal and interest is solely the obligation of the issuer. If sold prior to maturity, both types of debt securities are subject to market risk.

Investment Grade bonds - A rating that indicates that a bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds".

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