Record 30-Year Bond Yield Signals Investor Worries Over U.S. Finances
I remember when the politicians actually used to address the Federal deficit and national debt in their campaign rhetoric. They would use soaring consternation to bombastingly lecture their opponents about how we are “saddling our grandchildren” with the burden of fiscal misconduct, but the further along on this journey we go the more convinced I become the burden of this comeuppance may not wait for the grandchildren.
Now days, the pretense of managing the disastrous finances of the Federal government has seemingly disappeared from any serious politicking. Sure, an occasional Republican will claim the moral high ground and desire to fix Washington fiscal mess, but rarely does behavior in office match campaign trail rhetoric.
The truth of course is the fiscal math is beyond the ability to be “managed”. Thresholds of sustainability have been crossed, interest expenses have snowballed and rhetoric aside, no spending cuts for those on the right, or tax hikes for those on the left, are coming to solve this mess.
Instead of reverting back to our various political tribes in some sort for misplaced hope for being saved by our team or blaming the other team for the problem, I think it’s more important going forward to attempt to understand what the next stage of this cycle could look like, and it may look a little like last week.
Last week the Department of the Treasury held an auction for 30-year U.S. Treasury bonds. The government holds original auctions for these long-term bonds four times a year, although it will offer follow on supply of the bonds issued in the original auction on a monthly basis, the original auctions tend to set the tone and the market for various maturities, which in effect provides a glimpse into how investors, aka markets, are assessing the fiscal health and operations of the Federal government. This assessment takes the form of the yield, or interest rate, demanded by investors from the government.
Most experts would agree, auctions of long-term Treasury bonds provide the most useful evaluation of the nation’s fiscal future, as shorter-term bonds and notes are more influenced by Federal Reserve policy, and hence provide less pure market signals than the long-term debt, and at this time there is no longer term government debt than the 30-year Treasury bond. So, what did the market have to say?
Well, it wasn’t good. The auction resulted in a yield of 5.19%, representing a 19 year high for this maturity. While 30-year yields have occasionally breached the 5% level in the past two decades, the timing and nature of the most recent auction is throwing up red flags. Not only will the interest expense associated with this bond issue exacerbate the government’s fiscal challenges, but the message being sent is pretty clear; investors are expecting more a future of more persistent inflation and demanding to be compensated accordingly.
Sure, some of this market messaging may be linked to the spike in oil prices related to the conflict in Iran. I think most investors and consumers in general are braced for higher prices in the short term. When consumer expect higher prices, investors demand higher bond yields. To dismiss this dramatic move in long term yields as linked completely to oil and Iran may be short sighted as well.
The challenge with long term U.S. Treasury yields rising swiftly is this type of market move has the capacity to shift borrowing costs and bond values across the entire economy. While mortgage rates are more closely linked to the yield on 10-year Treasury bonds, 10-year Treasury bond yields are clearly influenced by their 30-year cousins. In addition, when yields reset in this way, existing bonds providing balance sheet value and collateral at banks, insurance companies and pension funds tend to adjust lower in response (bond values move lower when bond yields move higher), which has the capacity to create a cascade of associated problems. The last time this type of trend was experienced was in spring 2023, when one of the nation’s largest banks collapsed in 48 hours due to losses in its bond portfolio.
So, am I calling for the fiscal apocalypse based on these recent trends? No, of course not, the U.S. financial system and economy remain durable, but as the fiscal mismanagement of the Federal government continues to grow in scope, I think we can expect rolling pockets of instability which won’t just impact the grandchildren, but current workers, mortgage borrowers and retirees as well. The ship has sailed, let’s try not to fall overboard.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
