Markets were mixed yesterday until the President Trump announced a new investment push into AI.. The NASDAQ rose about 0.5%, the Dow gained about 1.0% and the Treasury yields nominally declined.
Many have commented the geopolitical and macroeconomic issues are the most daunting today than in at least two generations. Perhaps the biggest risk is persistently higher interest rates that could do serious damage to the government’s fiscal outlook and economic growth prospects.
Historically, long-term interest rates begin falling months before the Fed starts loosening, then flattened or keep falling afterwards.
This cycle, long term rates are behaving differently. Long term rates did not just rise but turned dramatically higher immediately as the Fed acted in September.
Higher long-term rates are helping restore the yield curve to its normal upward slope via an unusual concurrent rise in the long end as the Fed lowers the short end.
Longer dated Treasury yields are up as much as 115 bps since the Fed commenced lowering rates.
What does this reaction really mean?
Many are concerned that excessive government spending may cause a global financial crisis—not just in the US but perhaps everywhere. Most developed countries have excessive government debt that requires refinancing, so a crisis could begin elsewhere before reaching the US. This would not be the first time.
A major issue at hand is that the US government is still spending like a drunken sailor, an environment exacerbated by the highest interest rates for the Treasury curve since 2010. The Treasury average rate reached a low point in early 2022 according to Bloomberg.
Perhaps more concerning is that the Treasury average maturity is rising, perhaps the result of the shortest end of the range (Treasuries maturing one year or less ) is already about 33% higher than the recommended percentage of total debt outstanding.
The Treasury department states that since 2004, the Treasury weighted average maturity was around five years. Today it is six years.
Are the bond vigilantes starting to remerge following almost a thirty-year hiatus? The vast majority of today’s market participants believe bond vigilantes have gone the same path as land lines and dial up internet.
Is Treasury debt beginning to be repriced to reflect concerns about US fiscal stability? Rates are still historically low. The 10-year Treasury yield was in the 5% area and even up to 8% in the 1990s.
However, some believe the rapid increase in longer date debt is a warning shot. A case can be made that the remerging bond vigilantes just want to see progress in the right direction and reasons to believe the progress will continue.
What will happen today?
Last night the foreign markets were up. London was up 0.26%, Paris up 1.14% and Frankfurt up 1.29%. China was down 0.89%, Japan up 1.58% and Hang Seng down 1.63%.
Dow and NASDAQ futures are up 0.3% and 0.8%, respectively, as NFLX exceeded profit expectations. The 10-year is up 1/32 to yield 4.58%.
