Memorial Day reflections
Tim Leary, senior portfolio manager on the BlueBay US Fixed Income team, reflects on the significance of the Memorial Day holiday and investment opportunities amid U.S. spending challenges.
Key points:
- The U.S. allocated $850 billion, or 13% of federal spending, to defense in 2024. While funding many critical programs, this spending is part of broader fiscal challenges tied to underfunded social programs and growing deficits.
- Programs like Social Security and healthcare have significantly reduced poverty while improving access to healthcare for working families with children.
- Despite concerns about inflation and fiscal policy, current market conditions present opportunities for investors, reflecting the resilience of U.S. consumers and the economy.
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Hello & welcome back to The Weekly Fix, my name is Tim Leary and I’m a Senior Portfolio Manager on RBC’s BlueBay Leveraged Finance Team in Stamford, Connecticut.
I hope you all enjoyed your Memorial Day holiday. It’s a weekend for parades, barbeques, friends & family. It’s also an incredibly difficult time for those who have lost loved ones---loved ones who gave their lives for our freedom. Before we get into the Weekly Fix, I want to say thank you to those who have served, who are currently serving and for the families that surround them. The world is in your debt.
The Congressional Budget Office (CBO) reported that the U.S. spent $850 billion dollars, or about 17% of our 2024 federal tax receipts on defense. That works out to almost 13% of what the federal government spent for the year. That figure includes funding for everything from salaries, healthcare, and training for our troops as well as research & development (R&D), equipment, and capital for miliary installations worldwide. There are some market participants who believe that the U.S. has lost its desire to defend its allies and are bracing for a time when the dollar is no longer the world’s reserve currency. I don’t think that could be further from the truth. The United States wants to remain the military super power it is and we want our allies to be strong as well. That said, the U.S. does have a spending problem.
The issue facing congress is that that fixing the problem involves losing votes from Americans who have benefited from our underfunded Social Security program and the expansion of healthcare benefits. The reality is that if you were to look at a receipt for what the U.S. spent in 2024, it would show that the Department of Health & Human Services, Social Security Administration, Department of the Treasury, Department of Defense, and the Department of Veterans Affairs worked out to 86% of the bill. That doesn’t leave much for discretionary items, but it doesn’t make the United States a weaker nation either.
The Hamilton Project published a paper this month that highlights the growth in U.S. social safety net programs since 1970, which has served to reduce poverty and improve healthcare access. These programs have especially helped working households with children. They cite that the U.S. poverty rate in 2023 was 12.9% and without these programs, it would have been 23.4%.
In today’s polarized political environment, it’s easy to lose sight of the reason why the U.S. spends more per capita than any other major world power on defense, or how we find ourselves in the annual deficits we do. Depending on who is surveyed by economists, you may find some that expect inflation to remain elevated, while others expect a slow down to lead to a recession. While bond markets adjust to the reality that the U.S. has a spending problem, elevated interest rates present an opportunity for investors to capture real yield again. Ten-year TIPS yield more today than they did when I graduated from Fordham in 2004. The U.S. High Yield index is back to their average yield over the last 20 years, while the rating quality has improved dramatically over that same period.
So, this Memorial Day week, in between tariff tape bombs, take a moment to remember why U.S. consumers are strong, why the U.S. military and their families are strong, and why Americans will continue to strive for peace, prosperity, freedom, and growth.
Thanks for your time & good luck trading.
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