Debt and investment returns have shown significant shifts over the past decade, with high-risk investments yielding substantial rewards. The financial landscape has been characterised by remarkable growth, driven largely by macroeconomic factors such as public debt and monetary policy.
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- Nektarios Michail, an Economics Research Manager at Bank of Cyprus, provides these insights as part of the Cyprus Economic Society's blog, reflecting his personal views.
Debt and: Historic Investment Performance
Investors have benefited from a strong performance in various high-risk products. For instance, the S&P 500 index yielded approximately 14 per cent annually, while US real estate investments, excluding rental income, returned about 7 per cent per year. In Europe, the Eurostoxx 50 index achieved an annual gain of approximately 8.5 per cent, with the Greek stock market providing returns of around 7.2 per cent per year. This trend has continued into 2025, with gold prices soaring by 52.7 per cent year-to-date, and several stock indices, including those in Greece and China, performing exceptionally well.
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Public Debt’s Role in Market Growth
A major contributor to these market trends has been the dramatic increase in public debt. In the U.S., public debt escalated from approximately $8.5 trillion in 2005 to an astonishing $35 trillion by 2024. This surge has resulted in a debt-to-GDP ratio that has nearly doubled, now standing at 120 per cent. Such an increase in public debt has injected significant liquidity into the economy, enhancing investment capacity for both households and businesses. During the period from 2005 to 2007, when debt growth was more modest, the S&P 500 index recorded a much lower average annual increase of about 8.6 per cent.
Impending Consequences of Rising Debt
However, the sustainability of such high debt levels is under scrutiny. In 2005, with a debt-to-GDP ratio of around 66 per cent, the U.S. had adequate fiscal space to increase debt during economic crises, as seen in 2008. Yet, following the recovery in 2009, this upward trend in debt continued without restraint, erasing any available fiscal space. Presently, with a fiscal deficit nearing 6 per cent, there is growing pressure to reduce this deficit, which could potentially impact market returns.
Global Debt Trends: A Broader Perspective
This trend of escalating public debt is not confined to the U.S. China’s debt also surged from $600 billion to $16.5 trillion between 2005 and 2024, aimed at bolstering its domestic market and enhancing geopolitical influence. With a debt-to-GDP ratio exceeding 95 per cent in 2025, China’s fiscal space is narrowing, making it susceptible to external economic challenges.
In Europe, Germany has managed to keep its debt relatively stable, increasing from $1.9 trillion to $3 trillion over 20 years. In stark contrast, France’s debt has more than doubled and the UK’s has tripled, while Italy’s debt, already high, has seen a smaller increase. These shifts highlight the varying degrees of fiscal health among European nations, with France facing substantial budget deficits.
Investment Liquidity and Future Expectations
The substantial increase in liquidity over the last two decades has facilitated higher returns in global markets. However, as markets depend on continuous capital inflow, a decrease in liquidity may lead to a downturn in returns, moving them back to more sustainable levels. The U.S. is projected to gradually reduce its fiscal deficit, supported by rising trade tariff revenues and decreasing education expenditures. This adjustment is expected to normalise returns both domestically and globally.
The Impact of Monetary Policy on Returns
Monetary policy has played a pivotal role in shaping investment returns. The recent increase in interest rates, aimed at combating rising energy costs, led to negative returns in global financial markets in 2022. The previous decade featured zero interest rates in the U.S. and negative rates in the eurozone, which significantly contributed to stock market growth and allowed heavily indebted governments to manage their debt costs effectively.
However, this era is coming to a close. The European Central Bank’s interest rate currently stands at 2 per cent, with no anticipated changes until at least 2026. Meanwhile, the Federal Reserve’s rates are expected to decrease but remain higher than previous levels. It is unlikely that the U.S., eurozone, or UK will revert to zero interest rates unless faced with an economic crisis.
Changing Dynamics in Investment Returns
The macroeconomic landscape that facilitated remarkable gains in investments over the past decade is shifting. High levels of public debt necessitate urgent reforms, and combined with the reality of elevated interest rates, a normalisation of returns on high-risk investments is on the horizon. Conversely, returns on low-risk investments are becoming increasingly competitive. The dynamics of the investment landscape are evolving, and stakeholders must adapt to these changes to navigate the future effectively.
Nektarios Michail, an Economics Research Manager at Bank of Cyprus, provides these insights as part of the Cyprus Economic Society’s blog, reflecting his personal views.
