Is the proverbial sandpile near a tipping point? Worries about the ballooning deficit and the political anathema to tackle fiscal recklessness as it is akin to political suicide, impacted yesterday’s $16 billion 20-year Treasury auction.
Demand was regarded as “lackluster” sending yields the 20- and 30-year Treasury over 5%. The benchmark 30-year is now yielding the most since October 2023.
Some are dismissing yesterday’s auction as the 20-year is regarded as the ugly stepchild of Treasury benchmarks, partially because the 20-year lacks the depth of all other maturities, the velocity of the selloff however cannot be offhandedly dismissed.
The narrative is rising that unless Washington gets its finances in order—or perhaps more appropriately, begins to take the steps to get its financial house in order—the perceived risks of lending to the US government on a long-term basis may continue to rise.
This is an ugly environment given the country’s massive debt load of almost $37 trillion where it is projected that interest coverage may soon be equivalent to about 21% of the budget. Ouch!!
Perhaps former Treasury Secretary Steven Mnuchin put today’s environment into the proper perspective when he commented “the budget deficit is a larger concern to me than the trade deficit. So I am on the side of, I hope we do get more spending cuts—something that is very important.”
Mnuchin further stated it is a spending issue not a revenue issue as revenue collection is at the highest on record and the second highest in history on a percentage basis of the GDP.
Monetary policy assumptions are again changing. About two weeks ago, by year end four interest rate cuts were expected, declining to two then rising back to almost three and now perhaps only one.
Wow! This volatility is unprecedented. The two-year Treasury, or the instrument most sensitive to monetary policy, is in the middle of its well-established trading range of 4.4% to 3.6%, yielding about 4%.
Equites declined yesterday as the rising yields and perhaps margin pressure from companies’ absorbing the price increases from tariffs are beginning to be too hard to ignore.
What will happen today?
Last night the foreign markets were down. London was down 0.74%, Paris down 1.02% and Frankfurt down 0.93%. China was down 0.22%, Japan down 0.84% and Hang Seng down 1.19%.
Futures are flat. The tax bill narrowly passes in the House and now proceeds to the Senate. The 10-year is off 2/32 to yield 4.58%.
