In short
U.S. debt history and today’s divergence between federal and corporate borrowing, framed as a July 4 “Independence Day” episode.
Guest backgrounds
No guests mentioned; Andrew Sheets (Head of Corporate Credit Research, Morgan Stanley) speaks alone.
Key claims
Early colonial borrowing nearly collapsed the 1780s; Alexander Hamilton consolidated debts into a federal structure that lowered borrowing costs. Today, the U.S. runs a ~7% of GDP budget deficit, and House/Senate proposals could add ~$4T borrowing over the next decade. Morgan Stanley is not worried about the government’s ability to pay; near-term yields may fall with slower growth and Fed rate cuts in 2026, but borrowing uncertainty could raise long-term risk premiums and steepen the yield curve.
Notable examples
corporate balance sheets are “in very good shape” due to strong profitability, post-COVID refinancing at attractive rates, and conservative management; this keeps corporate-government yield spreads more compressed, unlike lower-rated (single-B or below) borrowers.
Written by AI. May contain mistakes. Listen to the episode to check what was said.
Chapters
Tap a time to open that second in VOHistorical Context of U.S. Debt
0:45 to 1:55
Exploration of U.S. debt history and Alexander Hamilton's role.
“The borrowing that made victory possible for the colonies also almost brought them down in the 1780s.”
Current Debt Dynamics and Corporate Health
1:55 to 2:56
Discussion on current U.S. budget deficits and corporate balance sheets.
“And to be clear, in the near term, we are forecasting at Morgan Stanley U.S.”
Comparative Analysis of Corporate and Government Debt
2:56 to 3:37
Comparison between corporate and government borrowing trends.
“but we see the same trend in Europe, where more conservative balance sheet trends and less relative issuance to governments is showing up on a year-over-year basis.”
Transcript
Automatic transcript. May contain errors.0:00Andrew Sheets:Welcome to Thoughts in the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today, on a special Independence Day episode of the podcast, we're going to talk a bit about the history of U.S. debt and the contrast between corporate and federal debt trajectories. It's Thursday, July 3rd at 9 a.m. in Seattle. The 4th of July, which represents the U.S. declaring independence from Great Britain, remains one of my favorite holidays. A time to gather with friends and family and celebrate what America is and what it can still be. It is also, of course, a good excuse to talk about debt.
0:43Andrew Sheets:Declaring independence is one thing, but fighting and beating the largest empire in the world at the time would take more than poetic words. The borrowing that made victory possible for the colonies also almost brought them down in the 1780s. under a pile of unsustainable debt. It was a young treasury secretary, Alexander Hamilton, who successfully lobbied to bring these debts under a federal umbrella, binding the nation together and securing a lower borrowing cost. As we'd say, it's a real fixed income win-win. Almost 250 years later, the benefits of that foresight are still going strong, with the United States of America enjoying the world's largest economy and the largest and most liquid equity and bond markets.
1:32Andrew Sheets:Yet lately, there's been more focus on whether those bond markets are, well, too large. The U.S. currently runs a budget deficit of about 7 % of GDP, and the current budget proposals in the House and the Senate could drive an additional$4 trillion of borrowing over the next decade above that already hefty baseline. Forecast even further out, well, they look even more challenging. We are not worried about the U.S. government's ability to pay its bills. And to be clear, in the near term, we are forecasting at Morgan Stanley U.S. government yields to go down as growth slows in the Federal Reserve cuts rates more than expected in 2026.
2:14Andrew Sheets:But all of this borrowing and all the uncertainty around it, it should increase risk premiums for longer term bonds and drive a steeper yield curve. So it's notable then, as we celebrate America's birthday and discuss its borrowing, that it's really companies that are currently unwrapping the presents. Corporate balance sheets, in contrast, are in very good shape, as corporate borrowing trends have diverged from those of the government. Many factors are behind this. Corporate profitability is strong. Companies use the post-COVID period to refinance debt at attractive rates. and the ongoing uncertainty, well, it's kept management more conservative than they would otherwise be.
2:55Andrew Sheets:Out of deference to the 4th of July, I've focused so far on the United States, but we see the same trend in Europe, where more conservative balance sheet trends and less relative issuance to governments is showing up on a year-over-year basis. With companies borrowing relatively less and governments borrowing relatively more, the difference between what companies and the government pay, that so-called spread that we talk so much about, well, we think it can stay lower and more compressed than it otherwise would. We don't think this necessarily applies to the low ratings, such as single B or lower borrowers, where these better balance sheet trends simply aren't as clear.
3:33Andrew Sheets:But overall, a divergent trend between corporate and government balance sheets is giving corporate bond investors something additional to celebrate over the weekend. Thank you, as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.
From the publisher
For a special Independence Day episode, our Head of Corporate Credit Research considers a popular topic of debate, on holidays or otherwise – national debt.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.
Today on a special Independence Day episode of the podcast, we're going to talk a bit about the history of U.S. debt and the contrast between corporate and federal debt trajectories.
It's Thursday, July 3rd at 9am in Seattle.
The 4th of July, which represents the U.S. declaring independence from Great Britain, remains one of my favorite holidays. A time to gather with friends and family and celebrate what America is – and what it can still be.
It is also, of course, a good excuse to talk about debt.
Declaring independence is one thing, but fighting and beating the largest empire in the world at the time would take more than poetic words. The borrowing that made victory possible for the colonies also almost brought them down in the 1780s under a pile of unsustainable debt. It was a young treasury secretary Alexander Hamilton, who successfully lobbied to bring these debts under a federal umbrella – binding the nation together and securing a lower borrowing cost. As we'd say, it's a real fixed income win-win.
Almost 250 years later, the benefits of that foresight are still going strong, with the United States of America enjoying the world's largest economy, and the largest and most liquid equity and bond markets. Yet lately there's been more focus on whether those bond markets are, well, too large.
The U.S. currently runs a budget deficit of about 7 percent of GDP, and the current budget proposals in the house and the Senate could drive an additional 4 trillion of borrowing over the next decade above that already hefty baseline. Forecast even further out, well, they look even more challenging.
We are not worried about the U.S. government's ability to pay its bills. And to be clear, in the near term, we are forecasting at Morgan Stanley, U.S. government yields to go down as growth slows and the Federal Reserve cuts rates more than expected in 2026. But all of this borrowing and all the uncertainty around it – it should increase risk premiums for longer term bonds and drive a steeper yield curve.
So, it's notable then – as we celebrate America's birthday and discuss its borrowing – that it's really companies that are currently unwrapping the presents. Corporate balance sheets, in contrast, are in very good shape, as corporate borrowing trends have diverged from those of the government.
Many factors are behind this. Corporate profitability is strong. Companies use the post-COVID period to refinance debt at attractive rates. And the ongoing uncertainty – well, it's kept management more conservative than they would otherwise be. Out of deference to the 4th of July, I've focused so far on the United States. But we see the same trend in Europe, where more conservative balance sheet trends and less relative issuance to governments is showing up on a year-over-year basis. With companies borrowing relatively less and governments borrowing relatively more, the difference between what companies and the government pay, that so-called spread that we talk so much about – well, we think it can stay lower and more compressed than it otherwise would.
We don't think this necessarily applies to the low ratings such as single B or lower borrowers, where these better balance sheet trends simply aren't as clear. But overall, a divergent trend between corporate and government balance sheets is giving corporate bond investors something additional to celebrate over the weekend.
Thank you as always for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.