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Welcome to Thoughts on the Market. I'm Andrew Sheats, 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 US debt and the contrast between corporate and federal debt trajectories. It's Thursday, July 3rd at 9am in Seattle. The Fourth of July, which represents the U.S. declaring independence from 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 US currently runs a budget deficit of about 7% of GDP and 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 US government's ability to pay its bills. And to be clear, in the near term we are forecasting at Morgan Stanley, US 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 presence. 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 fourth 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 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 of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today.
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