Global government bond yields extended their climb with the US 30-year reaching the highest point since 2011 and other benchmarks returning to 2008 levels.
Yesterday, the 30-year Treasury rose to 4.42%. On July 31st the yield was below 4.0%.
Bloomberg writes the yield on a Bloomberg index of global sovereign debt rose to 3.3%, the highest level since August 2008. Three years ago, this same index had a negative yield.
Proceeding with the negative diatribe, Bloomberg also writes its Global Aggregate Bond Benchmark had the best January on record, surging over 3.1%. Today this same index is posting a “sharply negative” total return.
The yield curve is steepening, the result of rising long-term interest rates, not a decline in short term rates. The steepening is perhaps the result of the emerging belief that inflation is becoming more imbedded and investors must be compensated for duration risk.
The increase in long-term yields is negatively impacting equities, specifically the mega sized tech behemoths. The NASDAQ is still posting a 27% 2023 return, the index has declined about 9% from its apex achieved about 3 weeks ago and before the yields on the 30-year Treasury began their current rise.
The yield on the thirty-year mortgage is now 7.58%. One year ago, it was 5.54% and two years ago it was around 3%. Will longer dated Treasuries follow the yield of mortgages, returning to the historical relationship between the two? Mortgages are more appropriately priced for today’s inflationary environment. If this does occur and everything else remains constant, longer dated Treasuries would have a “high six handle.”
Ouch! The carnage in the bond market would be great. The rising yields will also negatively impact interest coverage on the national debt and equity valuations.
Speaking of the national debt, it is projected the Treasury will potentially issue $7 trillion in gross supply of short-term debt by year end. This is an unfathomable amount.
Bloomberg wrote an extensive piece about this possible eventuality and its potential ramifications, ramifications that ranged anywhere from it will be a non-event given current yields to something more cataclysmic.
The rhetorical question to ask is whether the national debt and rising interest rates/interest coverage become the predominate narrative in the intermediate future.
A major reason for Fitch’s downgrade of the US Treasury was its projection that the 12-month rolling interest cost of the national debt will reach $1 trillion in six months. This is about 17% of the federal budget.
Another significant reason for the downgrade is the result of the Treasury Department increasing its estimate of additional funds required to pay the country’s bills for the third quarter from $733 billion projected in May to $1 trillion projected in July.
This massive demand for funds by the government is in the face of quantitative tightening where the Federal Reserve is selling $60 billion of debt monthly. The question at hand is who will buy all this debt given the Treasury purchased between 30% and 70% of net Treasury issuances for many years via quantitative easing.
What will happen today?
Last night the foreign markets were down. London was down 0.78%, Paris down 0.81% and Frankfurt down 0.69%. China was Japan down 0.55% and Hang Seng down 2.05%.
Dow and NASDAQ futures are down 0.1% and 0.35%, respectively. The 10-year is up 11/32 to yield 4.23%.
