How America's deficits became a line in UBS's accounts

UBS likes to present itself as the safest of the world's big banks: the staid Swiss custodian that swallowed Credit Suisse and now guards $7.3 trillion of other people's money. Its own strategists, however, paint a less soothing picture of the country that sets the price of money everywhere. In research published earlier this year, UBS projected American budget deficits would remain above 7% of GDP through 2026 and 2027, and federal debt would climb from 98% of GDP in 2024 to about 134% by 2035. Washington already carries the heaviest debt-service bill in the developed world.

Deficits of such stubbornness are not background noise for UBS. They are raw material.

A government running a shortfall of that size bills the market for roughly $2.5 trillion of new Treasuries every month. Each issue has to be originated, priced, traded and eventually held. That is precisely the franchise the bank has spent three years rebuilding, bolting Credit Suisse's fixed-income and rates desks onto its own; its Global Sovereign Markets unit banks central banks, sovereign-wealth funds and public pension funds. Debt issuance is a flow, and UBS is a toll-taker on it. The climate shows in the accounts: net profit of $2.8 billion in the second quarter and $5.8 billion in the first half, a return on core capital of 15.4%, and investment-bank revenues up 31% on a year earlier.

The trouble is that the fiscal bind is not a one-way tailwind, because the country cannot service its burden without someone being made to pay for it. UBS's economists spell out the toolkit Washington would reach for if bond yields ran too high: what they call financial repression. Its hinges run directly through bank balance sheets like UBS's. Loosen the leverage rule so banks can hold more government bonds without raising capital, and a capital-strong lender earns more on its sovereign exposure. Cap the deposit rates banks may offer, and net interest margins are protected from competition. The policy of making American debt affordable is, among other things, a quiet subsidy to the banks that hold it.

Yet there is a second edge, and UBS's own research does not spare the reader it. Repression works by holding down the returns on the very assets the house and its clients own; the disorderly rise in yields that the discipline is meant to prevent is the nightmare it guards against. In UBS's stress case, with yields parked near 5%, net interest costs would climb toward 17% of government revenues by 2030. The same bank that earns fees on issuance also holds the bonds: its $7.3 trillion of invested assets rest on allocations whose prices fall as yields rise, and a sell-off that shreds term premia would blow through its trading book even as it fills it.

Investors who file UBS under "Swiss safe-harbour wealth manager" are missing the direction of the entanglement. The takeover of Credit Suisse turned a boutique custodian into one of the largest fixed-income and rates houses in the world; the era of persistent deficits has turned the American state into one of its steadiest counterparties. UBS's profit is now partly a function of the fiscal bind its own economists describe. Reading the stock therefore means reading the politics of American debt — whether Washington can keep the market orderly, and at what price to the bondholders this bank serves.