Good morning, and happy Sunday everyone.

This piece isn’t about the (admittedly awful) 1988 comedy Twins starring Danny DeVito and Arnold Schwarzenegger. It’s about “twins” in a global macro sense.

As a father of twins, the concept has been on my mind for the past 17 years. In economics, we often talk about twin deficits and twin surpluses—two regimes that help describe whether a country is, broadly speaking, a net spender (twin deficits) or a net saver (twin surpluses).

Balancing the Budget

Balancing a budget isn’t only a household concept—it applies to countries too. A government’s budget position is its fiscal balance.

• When a government spends more than it collects in revenue (primarily taxes), it runs a fiscal deficit.
• A deficit must be financed, which typically means issuing more bonds and increasing outstanding debt.

Many developed economies have been serial over spenders for decades, steadily expanding bond issuance along the way.

For context, the last fiscal surplus in the United States was 2001, while here in Canada it was 2015. Interestingly, during periods of fiscal surplus, governments can reduce the amount of debt outstanding. Back in 2001, bond investors even worried the U.S. Treasury market might shrink materially because of persistent surpluses—an anxiety that feels almost quaint today.

Trade Balances

The trade balance—often discussed in tandem with the current account—measures the net balance of goods and services (and, in the current account, income flows) between a country and its trading partners.

• If a country imports more than it exports, it runs a trade/current account deficit.
• If it exports more than it imports, it runs a trade/current account surplus.

Just like fiscal deficits and surpluses, trade imbalances have offsetting capital flows.

• A surplus country receives excess foreign-currency inflows from trade. Those excess inflows are typically recycled outward via capital outflows—foreign reserves, foreign bond holdings, or investment in overseas assets. In effect, the country is net saving versus the rest of the world.
• A deficit country sends net currency out via trade. To fund that gap, it depends on capital coming back in through foreign savings and investment—foreign purchases of domestic assets (bonds, equities, real estate, direct investment, etc.).

Putting the “Twins” Together

If we look at fiscal balances and current account balances (as a percentage of GDP) across countries, we can generally bucket them into three cohorts:

1. Twin deficits (fiscal deficit + current account deficit)
2. Twin surpluses (fiscal surplus + current account surplus)
3. One of each (one surplus, one deficit)

The table below shows several countries and their current readings. Countries highlighted in red are running twin deficits, those in blue have twin surpluses, and those in white have one of each.

I’ve also included each country’s 10-year government bond yield. Countries in red are doing two things at once: increasing their debt load while also relying on external capital to fund a trade/current account shortfall.

Countries in blue are doing the opposite: reducing debt burdens (or at least improving their fiscal position) while also exporting capital to the rest of the world.

A few things stand out:

1. Twin deficits tend to be associated with higher sovereign yields.
   These countries are effectively paying a premium to finance themselves. In the table, the average 10-year yield for twin-deficit countries (red) is 8.6% (4.9% median).
2. Twin surplus nations tend to have lower-yielding government debt.
   Their creditworthiness is typically perceived as stronger, and they can often borrow more cheaply. In the table, the average 10-year yield for twin-surplus countries (blue) is 2.1% (2.0% median).

Of course, many other factors drive sovereign yields—especially inflation expectations and reserve-currency status. (For example, the U.S. dollar’s role as the world’s primary reserve currency has historically allowed the United States to borrow at lower rates than many peers.)

Still, fiscal and external balances play a meaningful role in how bond markets price sovereign risk.