Is U.S. Government Debt Still a Safe Haven Asset?

If you’ve been watching mortgage rates tick up again recently, contrary what you might assume, this latest rise isn’t primarily due to a spike in inflation. Instead, a more complex financial storm is brewing; one tied to rising deficits, a recent U.S. credit downgrade, and growing global skepticism about U.S. debt and it’s “safe haven” standing.

Let’s start with the basics. When the government spends more than it collects in taxes, it makes up the difference by borrowing, usually by issuing U.S. Treasury bonds of various durations. These bonds have long been considered among the safest investments in the world. But like any market product, their value is subject to supply and demand.

At the time of this writing, a new tax proposal making its way through Congress is projected to add roughly $2.5 trillion to the national deficit over the next nine years. While lower taxes can spur economic growth, in theory, they also reduce government revenue. Unless matched with spending cuts (which are rarely politically popular), lower revenues mean more borrowing, and more borrowing means more bonds hitting the market.

If there is too much supply and not enough demand for those bonds, their prices fall. When bond prices fall, their yields (or interest rates) go up. That’s because yields move inversely to prices: investors want to be compensated for holding riskier debt in a volatile environment.

This dynamic is a major reason why interest rates have been rising lately, even as inflation data has cooled slightly. Markets are absorbing the reality that the U.S. is on track to borrow aggressively for years to come, and at a time when the cost of borrowing is already high. It’s a cycle that feeds itself: more debt leads to higher interest payments, which leads to even more borrowing.

For context, net interest on government debt now exceeds total annual expenditures in each of the categories of healthcare, Medicare, and national defense.

This financial picture hasn’t gone unnoticed. On May 16, 2025, Moody’s downgraded the U.S. credit rating from Aaa to Aa1; the first time since the company began rating U.S. debt in 1949 that it has not held the top grade. The agency cited “deteriorating fiscal strength” and a lack of effective political consensus to tackle long-term budget challenges. According to Moody’s, the U.S. has not only accumulated record levels of debt (now more than $36 trillion) but faces rising interest costs and mounting political reluctance to course-correct.

While the U.S. remains highly creditworthy, the change reflects deeper concerns about long-term fiscal discipline and political will. In recent months, we’ve seen signs that foreign buyers, including central banks from countries like China and Japan, have been reducing their holdings of U.S. Treasuries. These governments have historically been some of the biggest buyers of our debt, helping to keep yields low. But concerns over dollar depreciation, geopolitical tensions, and more attractive returns elsewhere have started to shift that balance.

So, what does this mean for interest rates?

If global demand for U.S. debt weakens further, the Treasury will have to offer even higher yields to attract buyers. That raises borrowing costs not just for the government, but for consumers, businesses, and homebuyers. This is how budget policy in Washington ends up affecting what you pay on your mortgage in Playa Vista, or whether it is financially feasible to ever leave it behind for a new home.

Aren’t U.S. Treasuries still the safest investment on earth?

That depends on your definition of “safe.” Treasuries are still unlikely to default in the traditional sense. The U.S. can print its own money, which means it can always pay its debts in nominal terms. But that’s not the same thing as preserving value. If the only way to service the debt is by printing money, we risk devaluing the dollar and reawakening inflation. That’s not safe for savers, retirees, or anyone trying to build wealth over time.

In short, the “safe haven” status of U.S. debt is being tested, not because of a sudden crisis, but because of long-term structural choices. Unless we get serious about balancing budgets or managing spending, the market may continue to demand higher interest rates to compensate for the risk.

So, what should we expect going forward?

It’s entirely possible that rates will stay elevated or even rise further regardless of whether inflation comes down. If Congress passes new tax cuts without offsetting spending reforms, and if global buyers remain cautious, the forces pushing yields higher may only intensify.

As a real estate professional, I watch this closely because interest rates directly impact buying power, home affordability, and pricing trends in our neighborhood. If you’re planning a purchase, refinance, or investment, it’s important to consider how macroeconomic trends can filter down into local markets like Playa Vista.

I’d love to hear what you think about the tax bill, the Moody’s downgrade, or where you see interest rates going from here. Send me a message anytime.