Why rising debt may ripple into your investments—and what you can do about it.

In our last post, we broke down the national debt and why it matters to your financial plan. If you walked away wondering, “Okay, but what does that mean for my investments?”—we have you covered.

When the government runs a fiscal deficit, it borrows money to make up the difference. That’s how it continues funding operations, be it infrastructure, defense, or social programs. To do this, the Treasury issues bills, notes, and bonds that show up in many diversified portfolios. It’s a routine process, and the new debt replaces old as bonds mature.

But when the deficit grows and grows—and keeps growing—that routine process becomes less straightforward.

Interest rates, inflation, and market sentiment all start reacting. In this blog, we’ll talk about what that could mean for your portfolio, and how to stay prepared—not panicked.

Bonds: A Balancing Act

Let’s start with bonds, where the effects of rising deficits tend to show up first.

When the Treasury floods the market with new debt, basic supply-and-demand kicks in. More bonds available? Prices go down, yields go up. Investors may also demand higher yields if they feel they’re lending to a more indebted—or riskier—borrower.

Currently, the U.S. government still enjoys its “economic safe haven” status, but even that confidence has limits. If investors start to worry, they’ll expect more return for the risk. That’s why junk bonds pay more than Treasuries, and why Apple can borrow more cheaply than a shaky startup.

That said, if you have extra cash to invest, higher yields can be a great opportunity. But if you’re holding older bonds with lower interest rates, rising yields can drag down their market value. Long-term bonds are especially sensitive here.

So what do you do? You adjust.

When you consider that interest rates could increase and inflation could rise with the fiscal deficit, minimizing the percentage of longer-term bonds in your portfolio becomes a prudent strategy. Instead, consider a blend of shorter-term bonds and inflation-protected securities to help manage risk from rising interest rates and inflation.

Stocks: stronger but Not Immune

Stocks tend to handle inflation better than bonds—mainly because companies can raise prices and pass on costs to consumers. We saw this earlier with tariff chatter, and the same dynamic applies to fiscal deficits. But rising interest rates spurred by deficits can still create headwinds. That’s because higher borrowing costs can eat into corporate profits. Plus, uncertainty around government policy can spook markets—we’ve already seen some of that play out this year.

That doesn’t mean stocks won’t adapt. But in the short term, volatility is a very likely reality.

Currency: The Dollar Dilemma

An inflating fiscal deficit can also weaken the U.S. dollar—which, with certain investments, could be to your advantage.

International stocks and bonds can benefit, as currency movements could create a tailwind for returns. Real assets like commodities and real estate (often priced in dollars) can also appreciate when the dollar falls.

In inflationary environments, people often turn to gold and tangible assets that hold value over time. These aren’t panic purchases—they’re investments in strategic cushions that help protect your purchasing power when cash becomes less reliable.

The bottom line

You don’t need to overhaul your portfolio today, but you do need to consider the potential ramifications of the rising fiscal deficit. If Washington can’t tighten the reins on spending, markets will keep reacting—and you want your portfolio to be ready.

So, make sure you’re diversified globally. Add some real assets to your mix. Consider shorter-term bonds to limit interest-rate risk. And keep your equity exposure broad enough to handle inflationary shifts.

As always, we’re here to help—we can evaluate where you stand and help you make strategic, proactive adjustments. Because while we can’t control the deficit, we can control how we prepare for it.