The Deficit Effect
The investment topic du jour these days amongst our clients and cohorts is the direction of interest rates and my golf buddies have a keen ability to ask my opinion right when I’m lining up those 10-foot birdie putts. I’m sure the timing is just coincidental, but their interest is real as rates influence all kinds of business decisions. Last month I noted the flattening of the yield curve as long rates are rising and that process has accelerated over the last month. But the Fed doesn’t set long rates, the market does and it has another looming concern, surging treasury sales.
With the political season in full effect, rhetoric about federal budget deficits will crescendo until November 5th, but I prefer to examine the actual data rather than speculate. The government doesn’t take in enough from taxes to cover its spending and treasury bonds serve as the intermediary. Last year the Treasury issued $2.4 trillion more than in 2022 to cover the deficit and the total treasury market is now 60% LARGER than it was in 2019. The $2 trillion annual deficit will be the minimum in the coming years unless entitlements are addressed, which is a surefire way to a brief political career. Markets are beginning to understand this quagmire and the sheer mass of treasuries required to meet these deficits is pushing long rates higher as the 10-year treasury rate now sits at 4.4%, the high for the year.
Pressure on rates is rising and rates themselves are likely to follow. Don’t count on the Fed easing the Fed Funds rate to change this reality, especially as they continue to shrink their balance sheet. Expect and prepare for higher rates for a longer time.
As always, I appreciate your continued trust and confidence.