Assessing the Risks and Opportunities in Government and Consumer Debt Markets Amid Fiscal and Regulatory Shifts

In 2025, fiscal policy adjustments have reshaped the global debt landscape, creating divergent risks and opportunities for investors in government and consumer credit markets. As public debt levels climb and central banks recalibrate monetary strategies, the interplay between fiscal expansion and credit availability has become a critical focal point. This analysis examines how evolving fiscal policies in major economies are driving volatility in fixed-income markets while simultaneously influencing consumer borrowing behavior, offering insights into strategic investment considerations.

The Escalating Burden of Government Debt

Global public debt has surged past $100 trillion, with advanced economies like the U.S., EU nations, and China facing significant fiscal pressures. According to the IMF, public debt as a share of global GDP is projected to approach 100% by the end of the decade, driven by persistent deficits and rising interest expenses. In the U.S., fiscal deficits remain entrenched, with public debt expected to exceed 120% of GDP by 2026. Similarly, the euro area faces deteriorating fiscal positions, as Germany's 2025 deficit hit -3.0% of GDP, while France and Italy grapple with similar challenges according to the IMF. China's fiscal balance of -8.6% of GDP in 2025 reflects its struggle to offset trade headwinds and property market slumps according to OECD data.

These fiscal strains have directly impacted fixed-income markets. Higher government borrowing costs, driven by term premium increases, have pushed U.S. Treasury yields to multi-year highs, with 10-year yields surpassing 5.5% in late 2025. The OECD notes that expansive fiscal policies have exacerbated global debt sustainability risks, particularly for low-income countries, where 53% are now at high risk of distress. For investors, this underscores the growing importance of duration management and currency hedging in sovereign bond portfolios.

Consumer Credit: Resilience Amid Rising Costs

While government debt markets face headwinds, consumer credit markets have shown surprising resilience. U.S. consumer credit grew at a 2.7% annual rate in Q3 2025, with both revolving and nonrevolving credit contributing to the expansion. However, this growth is occurring against a backdrop of elevated interest rates and tightening lending standards. The Federal Reserve's Monetary Policy Report highlights that auto and credit card loan growth has slowed compared to 2024, as households adjust to higher borrowing costs.

Sector-specific vulnerabilities are emerging. The 2025 Credit Research Outlook warns that commercial real estate, high-yield corporates, and leveraged loans are particularly exposed to prolonged high-rate environments. For example, Dragonfly Energy's debt restructuring-reducing its principal to $19 million-illustrates how corporate borrowers are recalibrating strategies to manage liquidity. Meanwhile, the resumption of student loan delinquency reporting has dented credit scores for some borrowers, further complicating access to favorable terms according to the Federal Reserve.

Divergent Impacts: Government Yields vs. Consumer Rates

The disconnect between government bond yields and consumer credit rates is a defining feature of 2025's fiscal landscape. In the UK, the abandonment of a proposed income tax rise triggered a sharp spike in 10-year gilt yields to 5.56%, reflecting market skepticism about fiscal sustainability. While yields later eased on improved tax forecasts, the episode highlighted how fiscal uncertainty can ripple through both public and private credit markets.

In the U.S., the Treasury yield curve is expected to steepen as short-term rates decline relative to long-term bonds, a dynamic influenced by anticipated Federal Reserve rate cuts. However, this divergence has not translated into lower consumer borrowing costs. Instead, mortgage rates remain elevated, with lenders using government bond yields as a benchmark. This creates a paradox: while government debt markets offer attractive yields for investors, households face constrained access to affordable credit.

Strategic Implications for Investors

The contrasting dynamics in government and consumer debt markets demand a nuanced approach. For fixed-income investors, opportunities lie in high-quality sovereign bonds with manageable duration, particularly in emerging markets where fiscal reforms are underway. Conversely, risks persist in long-duration government bonds, where inflation-linked liabilities and debt sustainability concerns could drive volatility.

In consumer credit, private credit managers like Stellus Private Credit BDC are capitalizing on structural gaps, with 43 million in Q3 2025 investments reflecting demand for alternative lending solutions. However, investors must remain cautious about sectors like commercial real estate, where leverage and liquidity constraints could amplify downturn risks.

Conclusion

The fiscal policy shifts of 2025 have created a complex interplay between government and consumer debt markets. While public debt burdens and bond yield volatility present challenges, pockets of opportunity exist for investors who can navigate these dynamics with agility. As fiscal adjustments continue to unfold, a balanced portfolio that accounts for both macroeconomic risks and sector-specific vulnerabilities will be essential for long-term resilience.