$40-T U.S. Debt Raises Risk of a Lost Decade for Stock Returns

High stock valuations have prompted warnings of disappointing returns over the next decade. Now, the US government's staggering national debt is adding another risk that could weigh on investment returns, William Edwards reported for Business Insider.

US government debt surpassed $40 trillion for the first time in August. Treasury data showed total public debt outstanding reached approximately $40.047 trillion on Aug. 18.

Instead of substantially raising taxes or cutting spending to reduce the debt burden, policymakers could attempt to reduce the real value of debt through inflation, according to Tom Essaye, founder of Sevens Report Research.

This is related to what investors sometimes call the “debasement trade,” in which concerns about currency purchasing power support assets such as gold and other inflation hedges.

Long-term Treasury yields have also risen sharply.

The 10-year Treasury yield recently approached 4.8%, while the 30-year yield moved toward 5.3%, amid concerns about inflation, government borrowing and rising energy prices.

Historically, higher long-term bond yields can place pressure on stock valuations because safer fixed-income investments become more attractive relative to equities.

Higher borrowing costs can also weigh on corporate investment and economic growth.

A prolonged period of elevated inflation could therefore produce a different kind of “lost decade” for stocks, in which nominal stock prices rise but inflation significantly erodes investors' real returns.