An emerging narrative is that monetary policy will take a backseat as the primary focus of the sovereign debt markets. It is perhaps beginning to be replaced by what is happening with budgets and national debts.
Yesterday long dated Japanese debt sold off in dramatic fashion as the yield on its 30-year obligation almost broached a record and the 20-year benchmark is at the highest level since 2000.
The catalyst for yesterday’s selloff was the upcoming election where politicians are promising everything including the kitchen sink for votes.
German debt increased in yield the previous weeks as it has pledged to increase both military and infrastructure spending. British debt has also sold off.
Long dated French debt also is broaching multidecade high yields for similar reasons.
Debt markets are closely correlated and are interconnected a myriad of ways including currency [FOREX] markets.
Not only are the markets tapping into deeper concerns about excessive government debt and drunken sailor spending habits, but many are also now becoming fixated on the massive amount of debt maturing in the immediacy amplified by very sticky inflation in the developed world and the impact of tariffs.
While shorter maturity yields track the path of interest rates set by the various central banks, the loss of appetite at the long end of the yield curve is a more direct reflection of the fear that growing piles of sovereign debt around the world could ultimately reach a tipping point.
The US is planning to fund its massive deficit via short term borrowings, exceeding recommended levels hoping to lower interest expense. Nonpartisan Congressional budget organizations are forecasting the interest rate on total US debt will be around 2.5% in 2029. Is this realistic?
If rates and the amount of debt remain unchanged from current levels interest coverage on the nation’s debt would broach $2 trillion around 2030. Interest coverage was about $350 billion in 2020.
As noted many times and as accepted by most, it is a spending issue not a revenue issue, amplified by rising interest rates.
Speaking of interest rates and inflation, today the CPI is released. Will the statistics again surprise on the downside for the fifth consecutive month? Analysts are expecting a 0.3% increase on both the core and headline level, up from a 0.1% increase experienced last month.
Commenting on yesterday’s markets, as inferred longer dated Treasuries sold off moderately in response to the rout in Japanese long dated debt. Shorter dated Treasuries were essentially unchanged causing a nominal steepening.
Equites were nervously and nominally higher.
Earnings season commences today. Some staggering statistics…NVDA is worth $4 trillion or about 3.6% of global GDP according to Bloomberg. At its peak in 1999, CSCO—yesterday’s NVDA—was only 1.6% of global GDP.
The 10 S & P 500 companies comprise an incredible 40% of the benchmark’s capitalization.
Perhaps of even more significance, most believe it is the Magnificent Seven that has been carrying the market. Bloomberg writes that since December this cohort is down 3.5%. Year to date AAPL is off 15%, TSLA 22% and GOOG 5%. Wow!
Talk about a massive concentration of funds in one sector and few stocks.
Last night the foreign markets were up. London was down 0.06%, Paris up 0.18% and Frankfurt up 0.16%. China was down 0.42%, Japan up 0.55% and Hang Seng up 1.60%.
Dow and NASDAQ futures are flat and up 0.5% as NVDA has permission to sell its chips again to China. JP Morgan also topped earnings expectations as their trading and investment banking revenues were strong. The 10-year is up 2/32 to yield 4.42%.
