Debt is no longer rising quietly in the background of the global economy. Governments are borrowing more to fund security, energy and industrial policy, while companies are tapping markets to finance the build-out of artificial intelligence infrastructure. For investors, the question is how much additional issuance markets are willing to absorb, and at what price.
Few people these days sit closer to the intersection of geopolitics, fiscal policy and capital markets than Sonja Laud, chief investment officer at Legal & General Investment Management. From her perspective, the central risk facing markets is not a sudden downturn or a renewed surge in inflation, but the cumulative strain on public and private balance sheets in a world where spending pressures keep rising and political incentives point firmly away from restraint.
“We have not seen any government really willing to address spending,” Laud told Investment Officer in an interview. “We have seen focus on tax measures, we’ve seen focus on deregulation, everything to support growth, of course, but we have not seen any serious attempts to address the spending pattern.”
Spending now is permanent feature
That reluctance is becoming harder to ignore. In much of Europe, the geopolitical shift away from a rules-based global order has turned higher defence and energy spending into a permanent feature of economic policy rather than an exceptional response. At the same time, ageing populations and domestic political constraints are limiting governments’ willingness to confront the cost side of public finances.
In the United States, simple arithmetic already leaves little room for ambiguity. “For the United States, the numbers that we get out of the Congressional Budget Office is that the spending is expected at 7 trillion and income is 5 trillion,” Laud said. “So you have a 2 trillion gap and with no plan really so far that would address this.”
The burden of servicing that debt is becoming increasingly visible in market pricing. “Interest costs in the US are approaching 1 trillion and are by now surpassing the defence budget,” she noted. The shift underlines how fiscal choices are beginning to crowd out other priorities, even in economies that still enjoy solid growth and deep capital markets.
Markets, Laud argues, are starting to internalise these dynamics, albeit without drama. “The market will take note and we have seen some disquiet already,” she said. “And I believe this will remain a topic, whether 2026 will really create the first real impasses to be seen.”
Gradual adjustment
Rather than a sudden loss of confidence, she expects a gradual adjustment. “It is slower, more cumulative,” Laud said. “I’m not sure whether there’s, you know, a big bang at one point, unless you see a significant shift in the fundamentals.”
What distinguishes the current phase from earlier episodes of fiscal strain is that governments are no longer competing for capital in isolation. The build-out of artificial intelligence infrastructure is creating a parallel wave of borrowing, as hyperscalers scale up investment beyond what internal cash flow alone can support.
“Because it’s not just the government that will come to market and will ask investors for money,” Laud said. “There will be an enormous amount of paper being issued to support the capex of the hyperscalers.”
The scale of private capital demand is now comparable to that of sovereign borrowers. CreditSights estimates that the five largest hyperscalers will spend around 602 billion dollars on capital expenditure in 2026, a sum broadly on par with the combined government financing needs of France, at about 310 billion euros, and Germany, at roughly 180 billion euros.
Risk premiums
As public and private issuance rise simultaneously, the constraint shifts from access to capital to pricing. “There is a lot of paper that needs a new home and as such you need to be mindful again what level of yield, i.e. what level of risk premium or term premium you attach to as being attractive enough for investors to buy,” Laud said.
“And then of course, you come to the starting point with valuations being still quite rich across most risk assets,” Laud said.
Sonja Laud spoke to Investment Officer on 11 December. A week later UBS announced that she will join UBS Asset Management in July 2026 as co-head of investments. She will continue to work from London.