ABSTRACT The debt‐to‐GDP (DG) ratio should predict Treasury returns and primary surpluses according to the present‐value identity, yet empirical evidence remains elusive. This paper resolves this puzzle by decomposing the DG ratio into a slow mean‐reversion component and a local mean‐reversion component. We show that the local mean reversion of the DG ratio delivers substantially improved out‐of‐sample forecasting gains of Treasury debt returns and surpluses, outperforming the original DG ratio, the historical average benchmark, and the adjusted ratios subject to structural breaks. In contrast, the slow mean‐reversion component obscures predictive information by incorporating persistent, nonfundamental variation. Our findings are robust to alternative decomposition methods and DG ratio definitions (including nonmarketable debt). We develop a revised fiscal present‐value model to rationalize the findings.