Inflation up, approval down. You might think President Donald Trump would know this simple equation, although he does have a unique way of dealing with percentages.

Trump’s victory in 2024 owed a lot to Americans feeling that prices had gotten out of control under Joe Biden.

Yet from tariffs to tax cuts, through to the Iran conflict, this White House seems addicted to policies ballooning the federal deficit, embedding stickiness into supply chains and hiking commodity prices. It’s hardly surprising Trump’s approval has fallen to just 35%.

News that April’s CPI print came in at 3.8% – juiced by gas and groceries price jumps – will have worsened headaches among sponsors managing highly leveraged portfolio companies. Having started the year anticipating some relief across floating rate private credit instruments, it now seems far more likely the next Fed move will be a hike rather than a cut.

Indeed, the market is evens on the FOMC raising rates in December and sees a 58% chance of a hike by January 2027, according to CME FedWatch. Trump is desperate for rate cuts – and has succeeded in the appointment of Kevin Warsh to become the Fed’s new chair, but that doesn’t materially shift the balance within the FOMC or, more concretely, the fundamentals on which they base rate decisions.

Accompanying these economic storm clouds is the prospect that GOP hegemony over the three branches of government is likely to see its first major challenge in November’s midterm elections. As Continental Drift already spotted last year, cracks within the MAGA coalition and corporate frustration with aspects of Trump’s agenda are evidence of a potential “vibe shift” that could upend dynamics within the Beltway.

Could Democratic success help temper inflation expectations?

After all, despite a greater love of government solutions, Democrats seem far more likely than Republicans to seek revenue raising measures that might temper a federal deficit that will reach close to 6% of GDP this year and increase to 6.7% in 2036, according to the Congressional Budget Office. Outside of wartime or recession, the fiscal side of things is running hot.

Many observers would in any case class both projections as optimistic, while US deficits averaged just 3.8% of GDP over the past 50 years.

Alas, Democrats are in campaign mode and will stay there through the midterms and into the primary season laying ground for the 2028 presidential election. Candidates will be yoked to promises that further increase federal spending while cutting Americans’ contributions.

At a time when many policy wonks were hoping for fiscal realism, what we’re getting is further rounds of fantasy.

Senators Chris Van Hollen (D-MD) and Cory Booker (D-NJ) have each submitted tax proposals eyeing significant cuts for lower-to-middle income Americans, seeking to offset them by targeting higher-income taxpayers and corporations.

Both would reduce federal tax revenues, according to the non-partisan Tax Foundation. Under the Van Hollen plan, federal receipts would fall by a modest USD 86bn over a 10-year horizon; Booker’s proposal would cut the tax take by a whopping USD 6.7tn over the same period, the think tank argues.

It concludes that “both proposals would increase the federal budget deficit and reduce long-run GDP”.

This matters because both parties’ willingness to rely on the greenback’s reserve currency status to issue a never-ending supply of Treasuries will work right up to the point it doesn’t.

Already, 10-year Treasury yields are showing signs of stress, having climbed from a pre-Iran crisis low of 3.95% on 27 February to 4.56% (as of 15 May).

The one saving grace for sponsors running the rule on buyouts and seeking comfort on portfolio company value creation is that high yield spreads remain uncannily steady, consistently riding out episodes of volatility such as Liberation Day last year or the Iran episode to trim back to 280bps or thereabouts.

Again, as this column has argued, that spread likely reflects the glut of fixed income dry powder asset allocators are desperate to deploy, rather than a pricing mechanism doing its proper job of gauging risk.

And of course, a steeper rate curve than expected may not hit spreads but still adds to the leverage burden. Alongside AI impact on tech investments, a monomaniacal focus on scale and fear of smaller companies’ resilience in a troubled world, and evidence of resultant bid/ask tensions in the mid-market, sponsors appear to be more cautious on US buyouts year-to-date (YTD) than in 2025.

Emblematic of the challenges facing targets seeking sponsor interest is healthcare technology company Wellsky.

No-one disputes that Wellsky is an exceptional company, boasting EBITDA of some USD 400m. Current backers TPG and LGP are confident they have created substantial value and are engaged in a dual track exit process expected to secure significant private equity interest. And yet the 20x EBITDA valuation the sellside could have anticipated at the turn of the year may well be tough to land given AI-related jitters impacting the entire software ecosystem, Mergermarket has reported.

Anything consumer-facing is even more difficult. Keystone Capital has pulled the sale of its portfolio company Tribute Baking, with sources telling us bids missed expectations; Bubble Beauty CEO Shai Eisenman told Mergermarket it had made a “deliberate decision to pause” its sale effort having collected initial bids.

Investment committees appear reluctant to commit.

Private equity buyouts so far in 2026 total USD 82.6bn, down 37% from last year’s haul of USD 130.9bn over the same period, according to Mergermarket data. Deal count data gathering lags that for volume (which aggregates disclosed transaction values), so it is more of a moving target, but it also currently points south.

Source: Mergermarket

Clearly, most GPs will be focused on near-term concerns related to macro uncertainty, the technological revolution and portfolio management.

But looking ahead, there’s little to suggest a future administration from either party will embrace the degree of fiscal conservatism – either via spending restraint or tax increases – that would safeguard Treasury yields from running higher and provide cover for the Fed to keep a lid on rates.

When considering investments over a five-to-seven-year horizon, sponsors need to keep this firmly in mind as they model leverage for deals where they still have investment committee backing to strike.

Spreads may look inviting – just check what they’re stacked on.

Continental Drift is a weekly column offering commentary on the macroeconomic, political, and policy forces shaping the M&A landscape across the US and Europe. The opinions expressed here are those of the writer only.