Their Problem is Your Opportunity
Well, another fiscal year is in the books, and the ol' red, white, and blue has officially finished counting his money.
The results? Uhhh...not great. As expected.
But buried in these numbers is something I think investors should pay attention to. Because Washington's borrowing problem might actually be creating some interesting investment opportunities.
1. Uncle Sam's Report Card
For fiscal year 2026, the federal government reported approximately:
$5.4 trillion in revenue.
$7.4 trillion in spending.
$1.99 trillion in deficit spending.
$1.05 trillion in net interest expense.
For perspective, Washington spent roughly $137 for every $100 it collected.
Sounds like a fantastic financial plan (maybe they should hire one of us at Capstone...).
But what stands out to me is that roughly 14% of federal spending went toward net interest expense alone.
Not roads. Not defense equipment. Just servicing existing debt.
So where does Washington find another $2 trillion?
2. Everybody Wants Money. Including Washington.
In my previous article, 5%+ Is Supposed To Break Something...Right?, we discussed how the AI investment boom could be contributing to higher long-term interest rates.
Microsoft, Google, Meta, and others are pouring enormous amounts of capital into AI infrastructure.
And they're not the only ones looking for money.
Uncle Sam is standing right next to them with his hand out. Except he's asking for trillions. Again.
To finance deficits and refinance maturing debt, the Treasury issues securities that investors must be willing to purchase.
And when bond supply increases relative to demand, prices can fall and yields rise.
Of course, inflation, economic growth, and Fed policy matter too. But substantial government borrowing adds another consideration.
Here's the interesting part: the same elevated yields making Washington's debt more expensive could be creating opportunities for investors.
3. Higher Yields Sound Great. What's the Catch?
Let's say you purchase a 10-year Treasury yielding 5%.
Pretty attractive, right?
But remember, a safe borrower doesn't necessarily mean a stable bond price.
Enter Mr. Duration.
Duration is a fancy term that measures a bond's sensitivity to interest-rate changes. A bond with a modified duration of approximately 7.7 years could lose roughly 7.7% in market value if yields rise one percentage point.
Not exactly what you expected from a "safe" investment.
Holding an individual Treasury to maturity can eliminate that price uncertainty around principal repayment, assuming the government honors its obligations. But selling early could mean realizing a loss.
Then there's inflation risk. A 5% nominal yield isn't nearly as exciting if inflation is running at 4%.
And shorter-term bonds? Less duration risk, but potentially more reinvestment risk if rates fall.
The takeaway? Yield matters, but so does maturity, duration, inflation, and your investment horizon.
4. Stocks Have to Compete, Too.
Higher Treasury yields also change the math for equities.
If investors can earn 5% from government securities, they're likely going to demand more compensation for taking on stock-market risk.
Higher discount rates can pressure equity valuations, particularly for companies relying on profits further into the future.
But as we discussed in Maybe AI Is Finally Starting To Pay The Tab, stronger productivity and earnings growth could help offset that pressure.
So no, this isn't necessarily a "sell stocks, buy bonds" argument.
It's a reminder that the cost of capital matters, and today's higher-yield environment presents both opportunities and risks.
The goal isn't simply finding the highest yield.
It's understanding what you're being paid to own and whether that risk makes sense for your portfolio.
Because Uncle Sam might be willing to pay you 5% to borrow your money - that doesn't automatically mean you should give it to him.
