Investors are growing increasingly concerned about the potential impact of the mounting U.S. debt on the bond market, with the issue expected to take center stage as the presidential election approaches.

What Happened: The U.S. government's debt is expected to balloon, potentially overshadowing an anticipated bond rally. This is due to the ongoing large fiscal deficits, which show no signs of abating ahead of the presidential election, Reuters reported on Friday.

Investors are already adjusting their portfolios to mitigate potential losses if Treasury yields surge due to supply and demand imbalances. There are also concerns that the uncertainty surrounding the necessary debt for deficit spending could destabilize the $27 trillion Treasury market, a cornerstone of the global financial system.

Despite the focus on the Federal Reserve's potential interest rate cuts, analysts and investors anticipate that fiscal concerns will become more pronounced as the election nears. Both President Joe Biden and Republican candidate Donald Trump have not made reducing deficit spending a priority, according to the report.

Why It Matters: The concerns over rising U.S. debt come amid a broader financial landscape marked by significant shifts. On May 16, disinflation hopes began reshaping Treasury yields, with expectations of Federal Reserve rate cuts influencing market trends.

This shift contributed to an optimistic sentiment about potential rallies in bond ETFs, such as the Vanguard Total Bond Market ETF (NASDAQ:BND) and iShares J.P. Morgan USD Emerging Markets Bond ETF (NASDAQ:EMB).

Additionally, the S&P 500 and Nasdaq futures showed resilience ahead of key Federal Reserve speeches, indicating a market buoyed by optimism. This positive sentiment was reflected in the performance of major indices like the Invesco QQQ Trust, Series 1 (NASDAQ:QQQ), and SPDR S&P 500 (NYSE:SPY).

Photo by Austin Distel on Unsplash

This story was generated using Benzinga Neuro and edited by Pooja Rajkumari