The highly public spat between Tesla CEO Elon Musk and President Donald Trump over the One, Big, Beautiful Bill highlights an ongoing, decades-long debate over national debt. The focus of this article is to explore a potential scenario and suggest a way to invest in protection against it.
That path is via life and retirement insurance companies like Prudential Financial (PRU 0.18%), MetLife (MET 0.75%), and Corebridge Financial (CRBG 0.18%). Here's why.
Rising debt, rising debt servicing payments
This chart gets to the heart of the matter. As shown below, the U.S. national debt has increased substantially, and so has the level of debt in relation to the country's gross domestic product (GDP). The shaded areas show recessionary periods, including the financial crisis of 2008-2009 and the pandemic, whereby GDP contracted and spending soared, so naturally, the debt-to-GDP ratio did, too.
Still, the response in both cases was the same: more spending and more debt.
US Public Debt Outstanding data by YCharts.
Musk's view is that the national debt issue needs to be addressed as it's out of control and has the potential to saddle Americans with an unsustainable debt burden, which the bill will exacerbate. To be fair, the Trump administration's aim is not to increase the deficit as officials believe it will lower the deficit, through implementation of mandatory savings and promoting GDP growth.
Again, this is not the place to debate that matter. However, what if Musk is right and the U.S. continues down the path of rising debt?
Image source: Getty Images.
Higher interest rates could be around the corner
Rising debt levels and debt servicing payments imply more debt issuance. Simple economics argues that, unless demand improves, the rising supply of debt will lead to a rise in the price of debt. In other words, long-term interest rates will rise, and could be higher than the market is expecting.
The chart below indicates that the market is comfortable with the matter and isn't attaching a significant premium (beyond the usual premium to reflect the increased risk of holding longer-dated debt) to long-term interest rates over medium-term rates.
10 Year Treasury Rate data by YCharts.
But the market could be wrong. And while Musk's primary concern appears to be the difficulty of cutting rates caused by rising debt, it's only a short step away to argue that rising debt could lead to higher long-term interest rates.
Stocks to buy in a rising rate environment
The situation might not be catastrophic, but interest rates could be higher than anticipated. It's not an ideal scenario for stocks overall, as it makes them relatively expensive compared to bonds. However, there is one sector that could do well, namely life and retirement insurers such as Prudential Financial, MetLife, and Corebridge.
Image source: Getty Images.
These insurance companies pick up premiums from policyholders. The policies create long-term liabilities for insurers that they need to balance against their assets. As such, they tend to invest in relatively low-risk assets, such as government debt. While rising interest rates will reduce the value of the existing debt holdings, they will also increase the discount rate used to calculate the net present value of their liabilities.
Consequently, as rates rise, insurers will be able to buy corporate bonds, mortgage loans, and government debt at higher rates. Here's a breakdown of all three insurers and the assets they hold in their general accounts, which are used to match their liabilities.
|
General Account Assets |
Highest Share |
Second |
Third |
Notes |
|---|---|---|---|---|
|
Prudential Financial |
54.9% in publicly available for sale fixed maturities |
18.3% in privately available for sale fixed maturities |
14.4% commercial mortgage and other loans |
Mainly corporate and government fixed maturities |
|
MetLife |
31.6% investment grade corporate debt |
18.4% Net mortgage loans |
16.1% structured products |
Only $11.6 billion of its $430.9 billion in general account assets is in non-investment grade corporate and foreign government bonds |
|
Corebridge |
35% public corporate debt |
10% private corporate debt |
7% residential mortgage-backed securities |
97% in fixed income or short-term investments |
Data sources: Company presentations.
As indicated above, the assets in their general accounts are fixed income and relatively safe investments, giving all three companies good exposure to the theme of higher long-term rates.
Stocks to buy?
It's important not to be too alarmist here. The debt problem is undoubtedly an issue, but it's very hard to predict where interest rates, or total interest payable, will be. That said, if you are a young person worried about the public debt burden and the possibility of higher rates over your lifetime, then it makes sense to buy stocks in this sector as a form of (I'm avoiding the obvious word) matching your assets to your potential future liabilities from rising public debt servicing costs.
