May 13, 2026
US Government Finances Are Not Ready for a Recession
During US recessions, the budget deficit typically widens by around 4% of GDP as unemployment benefits surge and tax revenues collapse, see here.
That would be manageable if the US were entering a potential recession from a position of fiscal strength. It is not. In fact, the US has never entered a recession with this little fiscal buffer, see chart below.
The investment implication is clear: do not expect lower interest rates to bail out valuations. The standard recession playbook that growth slows, the Fed cuts, rates fall and multiples expand breaks down when the sovereign borrower is already stretched.
In the front end, inflation driven by higher energy prices, tariffs and immigration restrictions is proving stickier than the Fed expected, constraining how aggressively it can cut. At the long end, the fiscal trajectory is structurally bearish for bonds. Treasury is already funding record deficits almost entirely through T-bills to avoid putting upward pressure on long yields, a strategy that cannot continue indefinitely. When coupon issuance eventually has to increase, the supply shock will push long yields higher, not lower. And in a recession, the deficit blows out further, requiring even more issuance at precisely the moment when market appetite for duration is most uncertain, see also here.
The bottom line is that rates are staying higher for longer across the curve, and the traditional path to value creation through multiple expansion is largely closed. Value will have to come from the hard work of operational improvement, i.e., earnings growth, margin expansion and cash generation, and not from the discount rate doing investors a favor.
Sources: Congressional Budget Office (CBO), Macrobond, Apollo Chief Economist
