Concerns over US Government Debt

US government debt is back in the news after recently surpassing $40 trillion. Investors may find this level of debt concerning and wonder whether a change is needed in their portfolios.

One thing we should note is that debt level concerns have been around for a while now. In fact, government debt was the main culprit cited by Moody’s when downgrading the US sovereign debt rating last year.

Judging by credit default swap (CDS) spreads, it doesn’t appear the market’s assessment of the situation has gotten any worse recently. The CDS rate reflects the cost to insure against the US defaulting on its sovereign debt and as such has information about a bond’s credit quality. For the past three years, the rate has been around the same level, apart from a brief spike around the onset of tariff trepidation in April 2025.

This is important for investors to keep in mind—market prices reflect investors’ expectations for the future, including government debt levels and the anticipated fallout for stocks and bonds. Absent a major development in the debt picture, it’s not clear investors need to amend their asset allocation.

Exhibit 1

US Five-Year Credit Default Swap Spread (Basis Points)

August 24, 2023–August 24, 2026

‍

This article originally appeared in Above the Fray, a weekly newsletter for Dimensional clients. It was not created, written, or produced by TwoTen Planning.

Glossary

Basis points: One basis point equals 0.01%.

Credit default swap: A contract that acts as insurance where the seller of the swap agrees to compensate the buyer if a debt defaults.

Sovereign debt rating: An assessment of a country’s creditworthiness. Ratings are published by credit rating agencies.

Disclosures

The information in this material is intended for the recipient’s background information and use only. It is provided in good faith and without any warranty or representation as to accuracy or completeness. Information and opinions presented in this material have been obtained or derived from sources believed by Dimensional to be reliable, and Dimensional has reasonable grounds to believe that all factual information herein is true as at the date of this material. It does not constitute investment advice, a recommendation, or an offer of any services or products for sale and is not intended to provide a sufficient basis on which to make an investment decision. Before acting on any information in this document, you should consider whether it is appropriate for your particular circumstances and, if appropriate, seek professional advice. It is the responsibility of any persons wishing to make a purchase to inform themselves of and observe all applicable laws and regulations. Unauthorized reproduction or transmission of this material is strictly prohibited. Dimensional accepts no responsibility for loss arising from the use of the information contained herein.

This material is not directed at any person in any jurisdiction where the availability of this material is prohibited or would subject Dimensional or its products or services to any registration, licensing, or other such legal requirements within the jurisdiction.

“Dimensional” refers to the Dimensional separate but affiliated entities generally, rather than to one particular entity. These entities are Dimensional Fund Advisors LP, Dimensional Fund Advisors Ltd., Dimensional Ireland Limited, DFA Australia Limited, Dimensional Fund Advisors Canada ULC, Dimensional Fund Advisors Pte. Ltd., Dimensional Japan Ltd., and Dimensional Hong Kong Limited.

RISKS
Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a guarantee of future results. There is no guarantee strategies will be successful.

UNITED STATES

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.

Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.

The foregoing content reflects the opinions of TwoTen Planning and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as financial, legal, tax, or investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee or assurance that diversification, strategies based on Nobel prize-winning research, or any investment plan or strategy will be successful.