A $1.45 trillion debt threatens the economy: Julius Baer in a rare warning

Economists at the wealth management bank Julius Baer conducted a weekly economic review, focusing on the quarterly debt issuance review, the central bank's interest rate decision in India, and the country's inflation risks, which remain contained.

Afonso Borges, Fixed Income Research at Julius Baer, stated: "The US Treasury did not provide any surprises, leaving coupon sizes and its forward guidance unchanged. This removes one short-term risk for a rise in yields, but only delays the adjustment needed to deal with the growing funding gaps."

As expected, the US Treasury left nominal coupon auction sizes and its forward guidance unchanged, while still expecting auction sizes to remain stable "at least for the next few quarters."

This insistence is notable for two reasons. First, there was previous criticism that the Treasury used issuances to suppress long-term yields before the 2024 elections. Now, two years later, these concerns are even stronger given the larger funding needs, the Treasury's growing reliance on T-bills, and the approaching midterm elections.

Second, the Treasury Borrowing Advisory Committee (TBAC) saw justification for changing strategy: with a projected funding shortfall of $1.45 trillion in fiscal year 2027–2028, the committee recommended that the Treasury consider updating its guidance language to maintain flexibility.

"Reality is still waiting: unchanged guidance only delays the inevitable adjustment. The November debt issuance, which will take place after the midterm elections, offers a more convenient opportunity to soften the language," Borges added.

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Suk Yin Ng, Fixed Income Analyst at Julius Baer, commented on the situation in India: "The Reserve Bank of India (RBI) left its policy rate unchanged with a neutral stance, against a backdrop of contained inflation risks. If the Indian Rupee (INR) continues to stabilize and inflation expectations remain generally stable, the decision to leave the rate unchanged is logical, given that weakened consumer confidence is weighing on growth."

At its fourth consecutive meeting on Wednesday, the Reserve Bank of India kept its policy rate at 5.25%. The Monetary Policy Committee's decision was unanimous.

In its statement, the central bank noted that overall inflation pressures remain moderate, but warned of risks from higher food and fuel prices amid geopolitical tensions. Headline inflation for June accelerated to 4.38% year-on-year, above the 4% target, but still within the 2%–6% range.

The Reserve Bank of India revised its headline inflation forecast downward by 0.1 ppt to 5% and sharply lowered its core inflation forecast by 0.4 ppt to 4.3% for the fiscal year ending in March 2027 (FY27). The growth forecast for the same period was raised to 6.7% year-on-year.

Despite measures taken, the Indian Rupee (INR) remains under pressure due to oil price volatility and the strength of the US dollar. The currency received temporary relief on optimism regarding a peace agreement between the US and Iran, but remains the second worst-performing Asian currency year-to-date (-5.5%).