Both the Treasury and equity markets declined yesterday as solid economic growth, a continued rally in commodities and a flare up in geopolitical risks increased speculation that the Federal Reserve will keep rate higher for longer.
The “good news is bad news” trade has been revived, amplified by the JOLTS Job offerings were higher than expected and stronger than expected factory good orders.
The 10-year Treasury is at the highest yield of 2024, up about 55 bps from the start of the year. The 2-year benchmark or the instrument most sensitive to monetary policy is up about 35 bps, resulting in a steeping of the yield curve between the two year an ten year Treasury, a pivotal segment of the yield curve.
Many, including FRB Chair Powell legendary bond king Bill Gross and hedge fund legend Ken Griffen, have warned about the unsustainability of the federal debt. The government’s projections are using interest rates considerably lower than today’s rates.
Bloomberg Economics has run a “million simulations to assess the fragility of the debt outlook.” In 88% of their simulations, the results show the debt to GDP ratio is in unsustainable path—defines as an increase over the next decade.
Washington is gridlocked and, in the end, it may take a crisis—perhaps a disorderly rout in the Treasuries market triggered by sovereign US credit ratings downgrades, or a panic over the depletion of the Medicare or Social Security trust funds to force action. Some might say this is crazy, nuts or insane.
The US dollar and Treasury is the global benchmark. It would take a lot to shake confidence in the Treasury markets. If confidence does evaporate, the erosion of the dollar’s and Treasury standing would be a watershed moment, with the US losing not just access to cheap financing but also global power and prestige.
I hope there are some flaws in Bloomberg’s one million simulations. I must write however, by definition a crisis is never predicted, they occur triggered by some unforeseen event. Concerns about the national debt are perpetual, however today’s debt levels amplified by rising interest rates and massive interest coverage is unprecedented.
What will happen today?
Last night the foreign markets were mixed. London was down 0.34%, Paris up 0.20% and Frankfurt up 0.25%. China was down 0.18%, Japan down 0.97% and Hang Seng down 1.22%.
Dow and NASDAQ futures are flat and down 0.30%, respectively. Oil is up another 1% around $86/barrel, the highest level since October. The 10-year is off 2/32 to yield 4.37%.
