Debt Mountain, Inflation Storm: Navigating Fiscal Risks in 2025

The Debt-to-GDP Crisis: A Ticking Time Bomb
The U.S. federal debt-to-GDP ratio has hit a historic milestone: 100% in Q2 2025, according to the Congressional Budget Office (CBO). This isn't just a number—it's a flashing red light warning of fiscal instability. The CBO projects this debt to soar to 118% by 2035 and 156% by 2055, driven by rising interest costs and entitlement spending. If you're not worried about this, you're not paying attention.

This debt spiral threatens economic growth, interest rates, and investor confidence. The CBO warns that higher debt will crowd out private investment, slow GDP, and force the government to spend more on interest payments—$1.9 trillion alone in 2025. This is a minefield for the unwary.

Inflation: A Quiet Storm Brewing
While headline inflation has cooled—CPI dipped to 2.4% in May 2025, the lowest since 2021—don't be fooled. Core inflation (excluding volatile food and energy) is stubbornly high, hitting 3.1% in Q2, per the Federal Reserve's nowcasts. Key sectors like food and transportation services are ticking upward, while energy prices could rebound.

The Fed's preferred gauge, core PCE, is projected to stay above 3% through 2025, far from its 2% goal. This disconnect between headline and core inflation creates confusion. Bond markets are now pricing in persistent inflation risks, even as GDP growth slows to 1.5% in Q2 and recession odds hit 37%.

Bond Markets: A Tightrope Act
Investors are caught between two forces: slowing growth and stubborn inflation. The Federal Reserve's June 2025 projections keep the federal funds rate at 3.9%, but markets are split.

• Short-term bonds: Consider them for safety.
• Long-term bonds: Proceed with caution. The 10-year Treasury yield has fluctuated between 3.5% and 4% this year, reflecting uncertainty.

If inflation stays elevated, long-term bonds could get crushed. The iShares 20+ Year Treasury Bond ETF (TLT) has already taken a hit this year—down over 8% since January.

TIPS: Your Lifeline in a Storm
Here's where to focus: Treasury Inflation-Protected Securities (TIPS). These bonds adjust with inflation, shielding you from rising prices. The iShares TIPS ETF (TIP) offers a 1.8% yield and real protection.

Why now? The Fed's core PCE nowcasts suggest inflation will stay above 3% through 2025. TIPS' principal rises with inflation, so their returns could outpace regular Treasuries.

But don't overdo it. TIPS are no free lunch. Their yields are low, and they're not immune to rising rates. Allocate 5-10% of your portfolio to TIPS as a hedge, pairing them with short-term bonds or cash.

The Bottom Line: Stay Vigilant, Stay Diversified
The U.S. fiscal situation is a ticking time bomb, and inflation isn't dead—it's just hiding. Investors must navigate this minefield carefully.

• Avoid long-term bonds unless you're a risk-taker.
• Embrace TIPS for inflation protection but keep allocations moderate.
• Stay liquid—cash or short-term Treasuries (e.g., SPDR Barclays 1-3 Month T-Bill ETF (BIL)) can cushion volatility.

This isn't a time to be aggressive. Fiscal recklessness and inflationary pressures mean the safest plays are defensive ones. Don't let complacency cost you—act now before the storm hits full force.

The writing is on the wall: fiscal sustainability is in crisis. Protect your portfolio before the next chapter of this story unfolds.