While the Middle East war takes on the lion’s share of headlines, and rightfully so, there has been another development in bond-land that has gone relatively unnoticed. Indeed, one concern that crops up in the U.S. Treasury (UST) market is the potential for higher budget deficits from the already lofty current reading. With Q1 economic growth data recently being released, investors can now calculate how the U.S. debt load measures up as a percentage of GDP.

This calculation can come in some different forms, depending upon the inputs one utilizes. In our analysis, we will measure the total amount of U.S. marketable public debt outstanding as a percentage of nominal GDP, or GDP not adjusted for inflation. This tends to be one case where you probably don’t want to see ‘100’ on your scorecard. As of March 31, 2026 (the most recent data available), the debt/GDP ratio is getting dangerously close to that threshold and stands at roughly 97%.

The U.S. budget deficit for Fiscal Year (FY) 2025 came in at just under $-1.8 trillion. According to the Congressional Budget Office (CBO), the red ink total is expected to rise modestly to $-1.9 trillion for FYs 2026 and 2027. If accurate, the debt-to-GDP ratio may not hit that ‘100’ mark quite yet.

However, if you want to play the ‘long game’. The CBO estimates the deficit increasing to $-3.1 trillion by 2036. We know a lot can happen over the next ten years, so let’s just keep this analysis more in the present tense.

The natural question that comes to mind is whether this development is something to be concerned about. Well, it is no doubt not an enviable fiscal situation by any stretch of the imagination, we do not foresee any visibly adverse circumstances for the UST market.

Interestingly, back in March, the monthly 2, 5 and 7-year note auctions produced ‘tails’, or higher than when-issued traded yield levels during the actual bidding process. In addition, overall demand could be characterized as being on the tepid side. While the results didn’t rise to anything worrisome, they did produce some chatter in the media. Being veteran observers of the UST market arena for decades, we have learned that one should not draw any conclusions based on such small sample sizes. With the Middle East war and attendant rise in energy prices, the Treasury arena has experienced heightened volatility and increasing yield levels from pre-war readings. Sometimes, concessions just need to be built in to bring demand along.

We’re happy to report that the April auction calendar for those three maturities witnessed none of the above and actually saw demand pick-up in a moderate fashion. In fact, the new issue 2-year Floating Rate Note offering in April experienced its highest bid-to-cover ratio (a measure of demand) so far this year and its third best showing in over two years.

As we have mentioned in prior editions, while we would definitely prefer to see the U.S. fiscal situation improve and the amount of marketable public debt outstanding stop increasing as a percentage of GDP, the UST market still has both domestic and foreign buyers, a situation we don’t expect to see change any time in the foreseeable future.