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**SPEAKER_1** (0:02)
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**Tom Keene** (0:27)
You know, last week we got the data point that kind of stuck out. Forty trillion dollars, US government debt. The debt to GDP is now 128 percent, up from 40 percent maybe 40 years ago. It's just there's a bond market carry. It's been an issue ever since I've been on Wall Street, since the mid-80s is the growing US debt. And of course, a great financial crisis kind of spiked that. And then the pandemic even more. So Andrew Sheets, Global Head of Fixed Income Research, and Morgan Stanley.
Andrew, does your market, does your bond market care about a $40 trillion US debt?

**Andrew Sheets** (1:06)
Hey, good morning. It's great to be here. And look, I mean, I think you actually framed that perfectly. This has been an issue that's been around for a while. But I think it's taken on new significance in just the last decade. That $40 trillion US debt number, half of it came in the first 240 years of the United States, and the other half has come in the last 10 So the trend has been accelerating. Now, I think the good news is that objectively, the bond market is currently fine with that number. Rates of implied volatility in the bond market are pretty low.
Levels of inflation expectations are still pretty modest. The yield curve is kind of at an average level of steepness. So it's very hard to look at the bond market and say that there's some big objection to the number. Auctions are still being taken down, but it's clearly a large number. And I think combined with record AI spending and a lot of the issuance that's come on the back of that, it's trends that are causing investors a lot of concern around the supply of duration of the market and probably steepening the curve.

**Paul Sweeney** (2:14)
Andrew, we've got Treasury Secretary Bessent intervening in the bond market. It seems like a lot of that euphoria has faded, but there is talk that he could tap a trillion dollar Treasury general account to fund that buyback. Does that matter? Put that in perspective for us. What does that mean and why should we care if at all?

**Andrew Sheets** (2:35)
Yeah, so I think that is an important development in the story because the initial buybacks, we were talking about maybe $4 billion out of a total US debt of $40,000 billion. It's a pretty small relative number, but the Treasury general account, as you mentioned, is much larger. Our interest rate strategy team, they published a report recently on this. They think maybe $80 to $200 billion is a level of potential firepower that could be there. So those are large numbers, but there are challenges to that. That Treasury general account is the buffer that is utilized if there's a debt ceiling showdown. And we're not that far away from the midterm elections.
There's certainly a chance that the balance of power changes and the debt ceiling fights could be right back at the front of the agenda. And it also, it doesn't really change some of the other drivers of rates. The fact that global rates are rising, you know, rates in Japan, Germany are up. The fact that you have lots of AI-driven spending that's driving a lot of long-term corporate bond issuance. So there are a lot of things, and I think this is the challenge that the market's aware of, that are kind of out of the Treasury Secretary's hands.

**Tom Keene** (3:56)
Andrew, in terms of credit risk here, the question is, do we even go out there and try to take some credit risk? Because I can go to a two-year Treasury, get 422, I can go 10 years and get 465, 470 Are you suggesting your clients take credit risk on top of that?

**Andrew Sheets** (4:14)
So we're currently a bit cautious on the credit side, certainly the investment grade side. I do think that supply remains very heavy and will remain heavy this year. Credit spreads have been remarkably resilient.
You have seen some widening in the AI-driven names, but the overall index is still pretty tight. So you're still looking at pretty rich valuations. And I do think a good thing about credit, you know, you could say, is you know what the risk premium is. The risk premium is not some secret number. It's the spread minus an expected loss, and that spread minus expected loss is pretty low. And I think we're also in a part of the economic cycle that is burning hotter and burning more aggressive. You know, you have rising M&A volumes, you have rising levels of CAPEX, you have a lot of kind of excitement in markets, and that can be very supportive for equities, but it tends to be less supportive for credit when you get markets that are running hotter and seeing more aggressive activities. So even from kind of a cyclical perspective, I think that's also a headwind. So we have spreads widening modestly on the investment grade side. We think high yield could maybe outperform a little bit at the margin, but relative to investment grade. But we think that there's better risk reward elsewhere, particularly in stocks at the moment.