What do sky-high government debt and records for equities and gold mean for investors?

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Shares Magazine

12 March 2026

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Ask the experts. Russ Mould is on hand to answer your queries about the financial markets. If you'd like a question considered for a future edition, send it in now.

Equities and gold are close to all-time highs, while government debt has also sky rocketed. What does this mean for investors?

Simon

Russ Mould, AJ Bell Investment Director, says:

The combination of Liberation Day’s tariffs, wars in the Middle East and Eastern Europe, worries over the long-term impact of artificial intelligence on jobs, galloping government debts and stretched budgets and active debate about stock market bubbles does not look like a favourable one for investors. However, many will look back upon 2025 with contentment. Equities, bonds and commodities all provided positive returns. 

That said, there are some discordant notes, notably ructions in the cryptocurrency arena, while the ongoing surges in gold and silver may yet be harbingers of heightened volatility in the year ahead. From this perspective, the calm in the equity and fixed-income markets may look odd, especially as Western governments continue to overspend and pile up fresh borrowing, the interest payments for which could crimp growth and crowd out more productive investment elsewhere. 

However, there may be method in markets’ thinking, and the core thesis seems to be the so-called ‘debasement trade.’

A bond bonanza could be coming

A backbench rebellion over the two-child welfare cap by Labour MPs in the UK, the ‘Bloquons Tout’ public protests over changes to pensions in France and the debate over Obamacare subsidies that led to the government shutdown in America all had the same starting point as their origin: sovereign debt. 

All three nations have longstanding records of spending more than they generate in tax, with the result that borrowing is up in absolute terms, but also as a percentage of GDP. That may not be such an issue when interest rates are zero, as for much of the 2010s and early 2020s, but even small increases in headline borrowing costs, and thus sovereign bond yields, mean the interest bill can surge quickly.

It took America until 2003 to amass a total federal debt of $7 trillion. According to Congressional Budget Office estimates, the second Trump administration will add $7.4 trillion to the federal debt across its four-year term alone. Add in Federal Reserve interest rate hikes, and the need to issue new treasury bonds as old ones mature, and America’s interest bill now exceeds $1.1 trillion, or a fifth of the tax take.

President Donald Trump and treasury secretary Bessent are alert to the danger. They are trying to boost growth, raise tax income from tariffs and hector the US Federal Reserve into lowering interest rates, all in the cause of making the interest bill more manageable and reducing the debt-to-GDP ratio.

And it is the prospect of rate cuts that is supporting the US treasury market, where the benchmark 10-year yield is grinding lower, with the result that US sovereign bond market prices are grinding higher – even though supply continues to rise.

Speculation about a return to quantitative easing

Given that interest rates seem much more likely to trend down than up, not least because the government cannot really afford higher borrowing costs, the risk-reward profile for treasuries seems skewed toward return, all things being equal, especially now the US Federal Reserve’s balance sheet is no longer shrinking as quantitative tightening comes to an end. There is no chance of Fed asset holdings going back to their pre-Financial Crisis levels. Chatter already abounds that the Fed could return to quantitative easing (or QE for short) and bond-buying in the event of any unexpected economic or financial market turbulence. 

Such price-insensitive bond buying could bring near-term gains there are two long-term dangers here. 

The first is a recession. America’s public finances are a mess when the economy is doing well. A downturn would lower tax income, increase welfare spending and further increase the supply of US Government bonds. The only way out of that may be QE, or something that looks like it, and keeping interest rates artificially low. 

This is one form of the debasement trade, as government uses money printing, inflation and, in effect, financial repression to salt down debt-to-GDP ratios. This scenario plays to soaring gold and silver prices, as buyers seek protection from ‘paper’ promises, where inflation is the enemy and supply is plentiful, by buying ‘hard assets,’ where supply only grows slowly and there is perceived haven value.

The second is inflation. If the headline rate exceeds treasury yields, then fixed-income investors could start to see the value of their US treasury holdings erode in real terms. 

Gold and silver may get a further bid given how they were a good hedge against the ravages of inflation in the 1970s. Equities may respond more favourably to higher nominal GDP, and corporate earnings, growth, although a sustained inflationary outburst, again like that of the 1970s, would probably see multiple compression and overall valuations come down, since nominal growth would be less scarce (and less valuable). Both dangers represent the risk of currency, or asset, debasement owing to inflation and galloping supply (of money, bonds, or both).

It does therefore make sense that all three asset classes, fixed-income, equities, and precious metals, can go up at once. But it seems unlikely to last forever, given the fragile nature of government finances, and the Scylla and Charybdis of inflation and recession which lie in wait on either side of the scenario currently priced in by financial markets, namely steady growth, cooler inflation and gently lower interest rates.