US debt crisis forces investors to rewrite playbook: Talaria

Yasmine Raso

Senior Journalist, Financial Newswire

7 July 2025

The escalating US debt crisis, now predicted to be rising at more than twice the rate of US economy growth, has called for investors to rethink their portfolio strategy and seek out more “resilient” assets that can withstand ongoing volatility, according to new analysis from a boutique global equity specialist.

Talaria Capital’s Co-Chief Investment Officer, Chad Padowitz, said the estimation from the Congressional Budget Office that US debt could reach 200 per cent of GDP by 2047 should spur investors into rewiring their allocations to better prepare for impending increased volatility and uncertainty.

“To be forewarned is to be forearmed, and perhaps this time US debt is a signal that things are changing in a way that will have more profound effects on the way people invest their money,” he said.   

“Each year, the US is borrowing more and more money just to pay its interest bill. The country required US$1.9 trillion in foreign capital inflows last year to balance its external accounts, with foreign investors holding around US$62 trillion in US assets. To maintain current financing patterns, foreign investors would need to add roughly US$2 trillion annually to their holdings. 

“In addition, interest rates are significantly higher now than when the US last borrowed heavily after the GFC, and during the COVID pandemic. The interest payments on existing debt have become a major budget category, exceeding federal spending on Medicare and national defence in fiscal year 2024.  

“With higher interest rates prevalent in the current economic environment, the debt service burden compounds rapidly.” 

Padowitz encouraged investors to rewrite their “playbook” to include short duration fixed income assets, real assets and companies with strong balance sheets and cash flows, as all show signs of being able to weather economic and market downturns.

“In a world where the cost of capital matters again, paying attention to the timing and certainty of cash flows becomes critical,” he said.  

“Financial markets are now characterised by higher volatility and less predictability, so a portfolio that draws from uncorrelated sources of return and has exposure to ‘under-owned’ assets will be more resilient and Important for investors to achieve. 

“To that end, companies with low leverage and strong cash flows are better positioned to manage higher refinancing costs and economic volatility and should be a core inclusion to investors’ portfolio. 

“Real assets will also be key. Exposure to physical or inflation-linked assets like commodities, and infrastructure assets can help preserve purchasing power if inflation is persistent and diversification will remain important.” 

Padowitz also suggested that if the US government continues to delay making any policy improvements, the “world’s largest economy faces a future of either dramatically higher interest costs, forced fiscal consolidation, or potential financial instability”.

“The combination of increased debt issuance and potentially reduced foreign demand creates significant market risks. If foreign appetite for US assets weakens, pressure could mount on bond, currency and equity markets. Higher yields on US long-term bonds would increase borrowing costs across the economy, affecting everything from mortgage rates to corporate financing,” he said. 

“In such an environment, shorter duration assets are less vulnerable to capital losses when interest rates are rising, and are another important addition for portfolios.”