Highlights

• The US and Japan are confronted with rising bond yields and a surge in interest payments. Both the US and Japan have not entered a fiscal or sovereign debt crisis, but they are starting to feel the financial strains.
   

• The upward pressure on bond yields is exacerbated by elevated energy prices caused by the Middle East conflict, which is likely to be prolonged, as the US finds it increasingly difficult to extricate itself.
   

• Downgrade to MARKET WEIGHT. Our preferred pick is OCBC (BUY/Target: S$32.50) for its diversified growth from wealth management (63% of its fee income), trading income and insurance. We downgraded DBS (HOLD/Target: S$74.70) as valuation is stretched with 2027 P/B at 2.97x.

Analysis

• We previously highlighted Singapore banks as a hedge against potential sovereign debt crises in developed countries.
   

• Is the US entering a fiscal crisis? The US’ federal debt, budget deficits, and interest costs are on the rise. According to the Congressional Budget Office, the federal deficit is projected at US$1.9t in 2026. The IMF estimated that US general government debt would reach 142% of GDP in 2031, compared with 124% in 2026. Interest payments are now one of the fastest growing expenditure, exceeding US$1t annually. The US fiscal trajectory is becoming progressively unsustainable. Persistent budget deficits of around 6% of GDP, rising entitlement spending, and growing interest expenses could crowd out public investment. The US is not yet facing a full-blown fiscal crisis, but US treasury yields are now structurally higher. 
   

• Is Japan entering a fiscal crisis? Japan's fiscal position is the most stretched among developed economies, with gross government debt at 233% of GDP in 2026. Bank of Japan's gradual normalisation of monetary policy has materially increased debt-servicing costs after many years of ultra low interest rates. An ageing population and a shrinking workforce also place pressure on social security and healthcare spending. Japan is approaching a turning point. Expansionary fiscal policies and permanent tax cuts could reverse the recent decline in the debt-to-GDP ratio. Consequently, confidence in government finances is being undermined and Japan’s fiscal standing is expected to gradually deteriorate.
   

• Looming threat from a prolonged gulf crisis. While the US achieved early battlefield successes, Iran has escalated the conflict by targeting American bases, commercial shipping routes, and regional allies. The Strait of Hormuz is the most important energy chokepoint, carrying roughly one-fifth of global oil supplies. The sustained disruption to shipping has triggered higher oil prices and inflationary pressures, creating domestic political challenges for US policymakers. Iran's ability to use drones and missiles has forced the US to expend costly defensive systems, creating an expensive war of attrition. The US could get bogged down as it becomes increasingly difficult for the US to extricate itself from a prolonged conflict in the Middle East.