Bar chart showing year‑to‑date returns for global asset classes ending 2026 Q1. Silver and platinum have the highest gains, while crude oil and the USD show the largest declines. Data compares commodities, equities, fixed income, and crypto based on Bloomberg figures.
In our view, 2026 will be a year of rising fiscal pressure where foreign exchange increasingly focuses on fiscal credibility alongside interest rate differentials. That should keep the US dollar trading on the defensive, with the Japanese yen poised to outperform. Precious metals are likely to extend gains.
2025: The Year of Precious Metals
Silver, platinum, palladium, and gold emerged as standout performers in 2025 (chart 1) reflecting three underlying macro themes:
1. Above target inflation. Major central banks have eased to support growth while headline inflation in many advanced economies remains at or slightly above targets. As a result, real yields (nominal yields minus inflation) moderated and reduced the opportunity cost of holding non-yielding assets like precious metals (chart 2).
Line chart titled “Real 2‑Year Bond Yields (deflated by headline CPI)” showing real 2‑year bond yields for the US, EU, and UK from 2020 through 2026. All three regions’ yields fall sharply into deeply negative territory by 2022, then rise through 2023, with the US turning positive first. By 2024–2025, yields stabilize near or slightly above zero for all three regions, with modest fluctuations into 2026. Sourced from Bloomberg.
2. Persistent geopolitical uncertainty. Central banks, led by China, have been ramping up gold purchases since financial sanctions were imposed on Russia in 2022 (chart 3). This trend has gained momentum, with the world shifting from a unipolar to a multipolar world, making global politics more contested and crisis prone. Precious metals benefit in this new world order as they are free from direct links to the economic policy of any country, resistant to crises, and tend to retain their real value in the long term.
Line chart tracking global central bank gold purchases from 2010 through 2025, with projections listed through 2039. Demand peaks sharply in 2022–2024 and declines in 2025. Data sourced from the World Gold Council.
3. Artificial intelligence (AI) revolution. Precious metals are critical to the AI data center building boom (chart 4). Every new server and power system requires large amounts of silver, gold, platinum, and palladium for high performance chips, wiring, and energy infrastructure.
Line chart showing private U.S. data‑center construction spending from January 2015 through August 2025. Spending grows significantly over the period, with accelerated increases from 2022 onward.
In parallel, the US dollar edged lower against all major currencies in 2025 (chart 5) undermined by: US policy shocks in the first half of the year (tariffs, data reliability, fiscal worries, and threats to the Fed’s independence) and later with the Fed catching up with global peers on interest rate cuts.
Grouped table comparing 2025 spot returns versus the USD across G10, Asia, EMEA, and LATAM currencies. Returns vary widely, with the HUF, SEK, and COP showing the strongest gains, while TRY and some Asian EM currencies post losses.
Mounting Public Debt
According to the International Monetary Fund (IMF), public debt of the advanced G20 countries is seen rising to a new post-war record level of over 130% of GDP by 2030. The public debt outlook may be even worse due to looming expenditures on defense, costs arising from population ageing, the green transition, and political bias towards budget deficits.
Additionally, investor concerns about large fiscal deficits will keep longer-term sovereign bond yields under upward pressure and add to fiscal strains as rising debt is compounded by higher interest expense (chart 6).
A line chart titled ‘Advanced G20 Interest Expense’ showing interest expense as a percentage of GDP from 2000 to 2028. The line declines from about 2.2% in 2000 to around 1.5% by 2016–2018, then rises sharply starting in 2020, reaching above 3.2% by 2028.
At the same time, fiscal shocks could be amplified because sovereign debt is increasingly held by hedge funds2 (chart 7). Unlike banks or ‘real money’ private investors (pension funds, insurance companies, and asset managers), hedge funds are leveraged and highly liquidity driven. They rely on short-term secured borrowing (repo financing) from bank dealers to finance their investments. In periods of stress, funding can dry up, making fiscal shocks translate into faster, larger, and more correlated market moves.
A stacked area chart titled ‘Hedge fund sovereign debt exposures,’ showing gross notional exposure in trillions of US dollars from 2014 to 2025. The lower pink area represents US government debt, which gradually increases over time. The upper blue area represents non‑US sovereign debt, which also rises steadily, with a sharp increase after 2021. Combined exposures grow from roughly 1.5 trillion dollars in 2014 to over 6 trillion dollars by 2025.
Who’s Got Street Cred?
Countries whose primary budget deficit far exceeds their debt stabilizing primary budget balance lack fiscal credibility because this makes stopping debt growth more difficult. For reference, the primary balance is the government’s overall budget balance excluding interest expense and reflects whether current fiscal policy is adding to or subtracting from debt. The debt stabilizing primary budget is the primary balance required to stabilize debt given economic growth and borrowing costs.
Chart 8 shows the IMF’s latest forecast for the 2026 primary budget alongside our rough estimate of the debt-stabilizing primary balance, and chart 9 highlights the gap between the two. Switzerland is comfortably over-delivering on debt stabilization and Canada is hovering near debt stabilizing territory while the US and Japan have the largest shortfall, underscoring elevated long-term debt risks.
A clustered bar chart titled ‘Budget Balance % of GDP’ comparing two measures for nine economies: Switzerland, Canada, Eurozone, UK, Australia, New Zealand, Sweden, Japan, and the US. Each country has a blue bar for the 2026 Primary Budget Estimate and a red bar for the Debt‑Stabilizing Primary Budget Estimate. For most countries, both measures are negative, with the debt‑stabilizing estimate generally lower (more negative). Switzerland shows values near zero. Japan has a positive red bar but a moderately negative blue bar. The US shows the largest gap, with a blue bar near –4% of GDP and a red bar near –1.5%.
A bar chart titled ‘2026 Primary Budget Estimate Minus Debt-Stabilizing Primary Budget Estimate, % of GDP.’ It compares nine economies: Switzerland, Canada, Eurozone, UK, Australia, New Zealand, Sweden, Japan, and the US. Switzerland shows a positive value slightly above 1% of GDP. Canada is near zero. All others are negative, with increasingly larger gaps. Japan is around –2%, and the US shows the largest shortfall, near –3%. An arrow labeled ‘Low fiscal credibility’ points to the negative side of the chart.
One way to capture this credit risk is to look at bond yield-swap spreads, computed as the difference between the sovereign yields and overnight swap rates of the same maturity. Widening bond yield-swap spreads reflect a premium that investors require to absorb large sovereign bond issuances.
The 10-year bond yield-swap spreads for the US, UK, and the Eurozone have narrowed since peaking in March/April 2025, consistent with waning credit stress. In contrast, Japan’s 10-year bond yield-swap spreads sit near recent highs as the Japanese government is on track to ramp up bond issuances to finance extra spending (chart 10).
A multi‑line chart titled ‘10‑Year Government Bond Yield minus 10‑Year Interest Rate Swap’ showing the spread in percentage points from January 2024 to February 2026 for the US, Japan, UK, and EU. The US line (blue) fluctuates around 0.4% to 0.6% for most of the period before dipping toward 0.4% by early 2026. The UK line (red) ranges from about 0.25% to 0.55%, peaking mid‑2024 and gradually declining. Japan’s line (green) starts near –0.2%, rises steadily through 2024, briefly spikes in late 2024, and stabilizes around 0.15%–0.25%. The EU line (purple) remains negative throughout, generally between –0.4% and –0.1%, with moderate fluctuations. The chart highlights differing yield‑swap spreads across regions.
The multi-year high in the 10-year bond yield-swap spreads between Japan and the US highlights investors’ heightened concern over Japan’s fiscal outlook relative to the US (chart 11). That explains why USD/JPY remains overvalued relative to the level implied by US-Japan interest rate differentials (chart 12).
A line chart titled ‘10‑year bond yield‑swap spreads: Japan – U.S.’ showing the spread in percentage points from 2018 to 2026. The blue line stays negative throughout the period. From 2018 to early 2020 the spread fluctuates around –0.4%. It rises to around –0.2% in 2020, then gradually declines, reaching a low near –0.9% in mid‑2022, indicating improved Japanese credit risk versus the U.S. The spread then climbs again through 2023–2025, approaching –0.2% by early 2026. Labels on the chart note that lower values indicate Japan’s credit risk improves versus the U.S., and higher values indicate Japan’s credit risk worsens versus the U.S.
A dual‑axis line chart titled ‘USD/JPY Overvalued,’ showing the USD/JPY exchange rate (left axis) and the U.S.–Japan 2‑year bond yield spread (right axis) from June 2024 to February 2026. The blue line (USD/JPY) starts near 160, declines into the mid‑140s by late 2024, fluctuates through 2025, and rises again toward 155 before dipping slightly in early 2026. The red line (yield spread) begins around 4.7%, trends steadily downward over the period, and reaches about 2.3% by early 2026. The chart illustrates the exchange rate staying relatively high while the yield spread consistently narrows.
We believe worries over Japan’s fiscal profligacy are overdone. Japan’s nominal GDP growth is running at around four per cent and leading indicators point to an encouraging growth outlook, while 10-year government bond yields are closer to two per cent. With growth comfortably exceeding borrowing costs, Japan can sustain primary budget deficits without putting its debt ratio on an upward trajectory. In this environment, fiscal sustainability is far less fragile than markets currently imply, and the yen’s undershoot looks stretched.
That leaves the US with the weakest fiscal credibility among the major economies, and more vulnerable to renewed fiscal strain. Combined with the prospect of additional Fed funds rate cuts while most other major central banks have stopped easing, the American relative fiscal and monetary backdrop argue for a weaker US dollar over 2026.
1This article features contributions from Leo Ellenberg
2https://www.bis.org/speeches/sp251127.pdf
Brown Brothers Harriman & Co. (“BBH”) may be used to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the US Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2025. All rights reserved. IS-11256-2026-01-22
