With the second half of the year now underway, investors may want to take another look at their fixed income portfolio. High yields have been a boon to income investors, as the Federal Reserve increased interest rates over the past year. The ramp up, which began in March 2022 in an effort to tame inflation, has pushed yields higher on assets like U.S. Treasurys: The rate on the the 6-month T-bill is hovering just below 5.5%, while the 2-year note is at about 4.7%. Yields on certificates of deposit, money market funds and preferred securities have also seen a boost. US2Y US6M YTD line Yields on the 2-year Treasury and the 6-month T-bill Now the market is looking at the prospect of the Fed approaching the end of its hiking campaign. Policymakers indicated at their June meeting that two more quarter-point increases are on the way before the end of 2023. Indeed, traders anticipate another quarter-point increase next week. Inflation appears to be cooling with consumer and producer price increases coming in lighter-than-expected in June. “With regard to fixed income, I think all eyes are on the Fed, and it seems like the inflation data is getting more and more benign with each monthly report,” said James Franke, managing director at Rothschild Investment. Adding duration Moving into longer-dated issues allows investors to lock in higher rates, as the interest rate environment begins to normalize. Sonal Desai, portfolio manager and chief investment officer at Franklin Templeton Fixed Income, sees some upside in Treasury rates ahead, but believes those increase will soon be coming to an end. She’s moved to neutral in duration — a measure of interest rate risk — and is looking to extend it as the second half progresses. “We’re getting closer to the point that the U.S. 10 year ‘s [yield] is going to get closer to peak,” she said. “We do want to be long duration then. It’s not because we anticipate the Fed is embarking on a series of rate cuts … I, instead, believe we are getting ready to enter a more traditional fixed income market, where you will get lower returns” in the income component. Right now, Desai thinks investment-grade corporate bonds offer very healthy returns. As she increases duration, she’ll remain relatively high in quality, she said. See below for a list of bond ETFs with a duration of roughly six years. “Now might be the time to lock in with the anticipation the Fed could be done raising rates or cutting rates at some point in the future,” said Franke. Holding large concentrations of assets in short-dated Treasury bills leaves investors open to reinvestment risk once the central bank dials back its policy stance. He said that Rothschild has gone out as far as 15 to 20 years in municipal bonds due to their lower risk profile. They also generate income that is free from federal taxes — and free of state levies if the investor resides in the state where the bond was issued. For investment-grade corporate bonds, the longest Franke’s firm has gone out is seven years. “We’re probably a little less positive on investment-grade corporates,” he said. “We feel that for incremental yield, you’re not getting compensated enough to take the additional credit risk.” Keep quality in check Recession is the last thing investors want to think about, but now is a good time to snap up some portfolio cushioning at a lower cost. “Treasury prices are rarely this low,” said Callie Cox, investment analyst at eToro. “Based on prices being so low, it can be attractive to look at them as that sanity hedge, that protection in a recession.” Bond yields move inversely to prices. In a recessionary environment, Treasury prices will rise as investors flock to safe assets, which can help lift investors’ portfolios and hekp offset any decline in equities. Franke, meanwhile, has steered away from chasing yield, opting instead for safety. “For more of our clients, we’re looking to have the fixed income of the portfolio provide lower correlation and income,” he said. “Right now, those boxes are checked more efficiently in Treasurys, municipals and securities that are less risky and less correlated with stocks.” Aside from longer-dated municipals, Franke’s firm has also liked adding holdings in the short end of the Treasury yield curve, “where you can get 5% or more in interest lending to the U.S government in Treasury bills and notes.” Evaluate your asset mix and timeline Check in with your risk appetite and make sure that your bond allocation reflects your goals and your timing for the money. Greg Wilensky, head of U.S. fixed income at Janus Henderson Investors, generally prefers securitized assets such as asset-backed and mortgage-backed securities. Wilensky sees “tremendous opportunity” right now to add yield and carry without adding a lot of risks. “You can stay [at the] fairly short end of the yield curve, high credit quality, and get incremental yield,” he said. Individual investors who had been reaching for yield may want to reevaluate their holdings and ensure they are prepared to handle a downturn in the market later in the year or early next year. “You can’t think of high yield bonds in the same thought as Treasurys,” said Cox of eToro. “Consider shortening your time frame if you’re in high yield, or take some of that money off the table and put it into more conservative bonds.”
Tag: Government debt
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Traders turn optimistic on debt ceiling deal — and one strategist says it’s a ‘market opportunity’
WASHINGTON, DC – MAY 26: U.S. Speaker of the House Rep. Kevin McCarthy (R-CA) speaks to members of the media after arriving at the U.S. Capitol on May 26, 2023 in Washington, DC. Speaker McCarthy discussed the latest development of the debt ceiling negotiations with the White House. (Photo by Win McNamee/Getty Images)
Win Mcnamee | Getty Images News | Getty Images
Analysts are broadly optimistic that the deal to raise the U.S. debt ceiling will pass a divided Congress.
Their comments come after U.S. President Joe Biden and House Speaker Kevin McCarthy reached an agreement over the weekend to raise the debt ceiling to avoid a first-ever government default.
In the midst of this turmoil, investors may be able to find a “market opportunity,” according to Stephen Pavlick, partner and head of policy at Renaissance Macro Research.
Negotiators have agreed to some Republican demands, such as stricter work requirements for low-income Americans.
The compromise also sees the debt ceiling suspended until Jan. 1, 2025, pushing it past the 2024 presidential election. Spending will also be largely held flat for 2024, except for defense and veterans, while 2025 will see a 1% increase in spending.
Even though the in-principle deal has been reached between the two sides, it will still need congressional approval by both the House of Representatives and the Senate.
“I think it is virtually certain that it will be passed,” said Jeremy Siegal, professor of finance at Wharton School at the University of Pennsylvania. He said he had “very little doubt that they weren’t going to reach an agreement… this is going to be a done deal and voted positively on Wednesday.”
He called the suspension of the debt limit till 2025 a “good decision,” and said he had expected it would be only delayed for a year.
“I think that they decided that they wanted to go after the next election to raise that debt limit, and not have another debate that could distract the American public from the main issues that separate the country.”
Republican or Democratic victory?
Still, some Republican lawmakers criticized the deal after the announcement, while other hardliners have threatened to sink the deal.
Pavlick predicts that McCarthy has the support of a “majority of Republicans” in the House, “but that majority can vary significantly.”
Speaking to “Squawk Box Asia” on Monday, Pavlick noted that about 75 hardline Republicans will probably oppose the deal, pointing at the ultraconservative House Freedom Caucus, as well as hardline Democrats.
As such, with Republicans only holding a slim majority of 222-213 in the house, Pavlick said he thinks McCarthy will have to rely on moderate Democrats to get the bill to pass.
“So it’s really going to be on President Biden to deliver the 75 more moderate votes to make sure it has enough to pass the House. I think if it does that, then the Senate passage is probably assured.”
To Pavlick, the deal was a “Republican victory.”
“The fact that there was a negotiation is, in itself a win for Republicans,” he said pointing out that Biden said that he would not negotiate about the debt limit earlier this year, but was “forced into this.”
He said the Democratic Party could have “done away with this when they had control of Congress during the end of last year, two years ago. And they chose not to.”
David Roche, president and global strategist for Independent Strategy saw this as a “Democratic win.”
He expects the deal will pass the House with Democratic support, although, like Pavlick, he said right-wing Republicans will likely vote against it.
As the bill allows borrowing through 2024, the country will likely be able to put this issue behind until it comes up again in 2025, Roche said.
Investing opportunities
Pavlick said the U.S. Treasury is going to have to “refill their coffers”, and if investors are looking at a scenario where the Federal Reserve is going to cut rates, “this might actually provide [a] market opportunity,” he said.
Pavlick suggests investors could look at buying Treasury bonds to “lock in some of those higher yields.”
Separately, Siegal pointed out that U.S. futures pointed to slight gains, and said it’s because a likely deal “does clear a little bit of uncertainty.”
However, the main worry ahead for investors will be the “tremendous tightening” that the Federal Reserve has done, Siegal warned.
“The bank problems, that will not lead to a crisis of bank deposits but tightening of lending standards, particularly for small- and mid-sized companies. And I am concerned about the second half of the year and possibly what we might see is now is a focus on those problems.”
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Why the GOP Wants to Rob Gen Z to Pay the Boomers
The budget cuts that House Republicans are demanding in their high-stakes debt-ceiling standoff with President Joe Biden sharpen the overlapping generational and racial conflict moving to the center of U.S. politics.
The House GOP’s blueprint would focus its spending cuts on the relatively small slice of the federal budget that funds most of the government’s investments in children and young adults, who are the most racially diverse generations in American history.
Those programs, and other domestic spending funded through the annual congressional-appropriations process, face such large proposed cuts in part because the GOP plan protects constituencies and causes that Republicans have long favored: It rejects any reductions in spending on defense or homeland security, and refuses to raise taxes on the most affluent earners or corporations.
But the burden leans so heavily toward programs that benefit young people, such as Head Start or Pell Grants, also because the Republican proposal, unlike previous GOP debt-reduction plans, exempts from any cuts Social Security and Medicare. Those are the two giant federal programs that support the preponderantly white senior population.
The GOP’s deficit agenda opens a new front in what I’ve called the collision between the brown and the gray—the struggle for control of the nation’s direction between kaleidoscopically diverse younger generations that are becoming the cornerstone of the modern Democratic electoral coalition and older cohorts that remain predominantly white and anchor the Republican base.
The budget fight, in many ways, represents the fiscal equivalent to the battle over cultural issues raging through Republican-controlled states across the country. In those red states, GOP governors and legislators are using statewide power rooted in their dominance of mostly white and Christian nonurban areas to pass laws imposing the conservative social values and grievances of their base on issues including abortion, LGBTQ rights, classroom censorship, book bans, and even the reintroduction of religious instruction into public schools. On all those fronts, red-state Republicans are institutionalizing policies that generally conflict not only with the preferences but even the identity of younger generations who are much more racially diverse, more likely to identify as LGBTQ, and less likely to identify with any organized religion.
The House Republicans’ plan would solidify a similar tilt in the federal budget’s priorities. Because Social Security, Medicare, and the portion of Medicaid that funds long-term care for the elderly are among Washington’s biggest expenditures, the federal budget spends more than six times as much on each senior 65 and older as it does on each child 18 and younger, according to the comprehensive “Kids’ Share” analysis published each year by the nonpartisan Urban Institute. Eugene Steuerle, a senior fellow there who helped create the “Kids’ Share” report, told me, “We are already in some sense asking the young to pay the price” by cutting taxes on today’s workers while increasing spending on seniors, and accumulating more government debt that future generations must pay off.
Spending on children 18 and younger now makes up a little more than 9 percent of the federal budget, according to the study. But that number is artificially inflated by the large social expenditures that Congress authorized during the pandemic. By 2033, the report projects, programs for kids will fall to only about 6 percent of federal spending.
One reason for the decline is that spending on the entitlement programs for the elderly—Social Security, Medicare, and Medicaid—will command more of total spending under the pressure of both increasing health-care costs and the growing senior population. Under current law, in 2033 those programs for seniors will expand to consume almost exactly half of federal spending, the “Kids’ Share” analysis projects.
By protecting those programs for seniors from any cuts, and rejecting any new revenues, while exacting large reductions from programs for kids and young adults, the GOP plan would bend the budget even further from the brown toward the gray. The implication of the plan “is that children will get an even smaller slice of federal spending” than anticipated under current policies, Elaine Maag, an Urban Institute senior fellow and a co-author of the “Kids’ Share” report, told me.
Federal spending on kids is particularly at risk because of how Washington provides it. The federal government does channel substantial assistance to kids through tax benefits, such as the child tax credit, and entitlement programs, including Medicaid and Social Security survivors’ benefits, that are affected less by the GOP proposal. But many of the federal programs that benefit kids and young people are provided through programs that require annual appropriations from Congress, what’s known as domestic discretionary spending. As Maag noted, the programs that help low-income and vulnerable kids are especially likely to be funded as discretionary spending, rather than entitlements or tax credits. “Head Start or child-care subsidies or housing subsidies are all very targeted programs,” she said.
The GOP plan’s principal mechanism for reducing federal spending is to impose overall caps on that discretionary spending. Those caps would cut such spending this year and then hold its growth over the next nine years to just 1 percent annually, which is not enough to keep pace with inflation. Over time, those tightening constraints would result in substantially less spending than currently projected for these programs. If the GOP increased defense spending enough to keep pace with inflation, that would require all other discretionary programs—including those that benefit kids—to be cut by 27 percent this year and by almost half in 2033, according to a recent analysis by the Center on Budget and Policy Priorities, a progressive advocacy group. If the GOP also intends to maintain enough funding for veterans programs (including health care) to match inflation, the required cuts in all other discretionary programs would start at 33 percent next year and rise to almost 60 percent by 2033.
As Sharon Parrott, the president of the Center on Budget and Policy Priorities, told me this week, by demanding general spending caps, the GOP does not have to commit in advance to specific program reductions that might be unpopular with the public. “What they are trying to do is put in place a process that forces large cuts without ever having to say what they are,” Parrott said.
Federal agencies have projected that the cuts required under the Republican spending caps would force 200,000 children out of the Head Start program, end Pell Grants for about 80,000 recipients and cut the grants by about $1,000 annually for the remainder, and slash federal support for Title I schools by an amount that could require them to eliminate about 60,000 teachers or classroom aides. The plan also explicitly repeals the student-loan relief that Biden has instituted for some 40 million borrowers. Its cuts in the Temporary Assistance for Needy Families program, generally known as welfare, could end aid for as many as 1 million children, including about 500,000 already living in poverty, the Center on Budget and Policy Priorities has calculated.
The appropriations bill that a House subcommittee recently approved for agricultural programs offers another preview of what the GOP plan, over time, would mean for the programs that support kids. The bill cut $800 million, or about 12 percent, from the Special Supplemental Nutrition Program for Women, Infants, and Children. Parrott noted that to avoid creating long waiting lists for eligibility, which might stir a more immediate backlash, the committee instead eliminated a pandemic-era program that gave families increased funding through WIC to purchase fruits and vegetables. “They are saying the country can’t possibly afford to make sure that pregnant participants, breast-feeding participants, toddlers, and preschoolers have enough money for fruits and vegetables,” she said.
Parrott doesn’t see the GOP budget as primarily motivated by a desire to favor the old over the young. She notes that the GOP plan would also squeeze some programs that older Americans rely on, for instance by reducing funds for Social Security administration or Meals on Wheels, and imposing work requirements that could deny aid to older, childless adults receiving assistance under the Supplemental Nutrition Assistance Program.
Instead, Parrott, like the Biden administration and congressional Democrats, believes that the GOP budget’s central priority is to protect corporations and the most affluent from higher taxes. “To me, that’s who they are really shielding,” she said.
Yet the GOP’s determination to avoid reductions in Social Security and Medicare, coupled with its refusal to consider new revenue or defense cuts, has exposed kids to even greater risk than the last debt-ceiling standoff. Those negotiations in 2011, between then-President Barack Obama and the new GOP House majority, initially focused on a “grand bargain” that involved cuts in entitlements and tax increases along with reductions in both discretionary domestic and defense spending. Even after that sweeping plan collapsed, the two sides settled on a fallback proposal that raised the debt ceiling while requiring future cuts in both domestic and defense spending.
The House Republicans’ determination to narrow the budget-cutting focus almost entirely to domestic discretionary spending not only means more vulnerability for programs benefiting kids, but also less impact on the overall debt problem they say they want to address. Even some conservative budget experts acknowledge that it’s not possible to truly tame deficits by focusing solely on discretionary spending, which accounts for only about one-sixth of the total federal budget. Brian Riedl, a senior fellow and budget expert at the conservative Manhattan Institute, supports Republican efforts to limit future discretionary spending but views it only as an attempt to “prevent the deficit from getting worse.”
Riedl told me that in his analysis of long-term budget trends, he found it impossible to prevent the federal debt from increasing unsustainably without also raising taxes and significantly slowing the growth in spending on Social Security and Medicare. But, as he acknowledged, the GOP’s willingness to consider reductions in those programs has dwindled as their electoral coalition in the Donald Trump era has evolved to include more older and lower-income whites. “As the Republican electorate grew older and more blue collar, they revealed themselves as more attached to entitlements [for seniors] than previous Republican electorates,” he said.
Trump in 2016 recognized that shift when he rejected previous GOP orthodoxy and instead opposed cuts in Social Security and Medicare. Trump has maintained that position by publicly warning congressional Republicans against cutting the programs, and attacking Florida Governor Ron DeSantis, who entered the 2024 GOP race yesterday, for supporting such reductions in the past. Biden has also pressured the GOP to preserve Social Security and Medicare.
Though it’s not discussed nearly as much, the GOP’s refusal to consider taxes on high earners also has a stark generational component. With the occasional exception, older Americans generally earn more than younger Americans (the top tenth of people at age 61 earn almost 60 percent more than the top tenth of those age 30). Older generations are especially likely to have accumulated more wealth than younger people, Steuerle noted. As part of the economy’s general trend toward inequality, Steuerle said, older generations today are amassing an even larger share of the nation’s total wealth than in earlier eras.
Refusing to raise taxes on today’s affluent while cutting programs for contemporary young people subjects those younger generations to a double whammy. Not only does it mean that the federal government invests less in their health, nutrition, and education, but it also increases the odds that as adults they will be compelled to pay higher taxes to fund retirement benefits for the growing senior population.
Although Biden also wants to avoid cuts in entitlements for seniors, his call for raising more revenue from the affluent still creates a clear contrast with the GOP. By proposing higher taxes, Biden has been able to devise a budget that protects federal spending on kids and other domestic programs while also reducing the deficit. Biden’s budget proposal achieves greater generational balance than the GOP’s because the president asks today’s affluent earners, who are mostly older, to pay more in taxes to preserve spending that benefits young people. If Biden reaches a deal with congressional Republicans to avoid default, however, their price will inevitably include some form of spending cap that squeezes such programs: the real question is not whether, but how much.
Looming over these choices is the intertwined generational and racial re-sorting of the two parties’ electoral coalitions. As Riedl noted, especially in the Trump era, the GOP has become more dependent on older white people who are either eligible for the federal retirement programs or nearing eligibility. According to a new analysis published by Catalist, a Democratic electoral-targeting firm, white adults older than 45 accounted for just over half of all voters in the 2022 and 2018 midterm elections and just under half in the 2020 and 2016 presidential campaigns. But because those older white Americans have become such a solidly Republican bloc, they contributed about three-fifths of all GOP votes in the presidential years, and fully two-thirds of Republican votes in midterm elections.
Democrats, in turn, are growing more reliant on the diverse younger generations. Catalist found that Democrats have won 60 to 66 percent of Millennials and members of Generation Z combined in each of the past four elections. Those two generations have more than doubled their share of the total vote from 14 percent in 2008 to 31 percent in 2020. Adding in the very youngest members of Generation X, all voters younger than 45 provided almost 40 percent of Democrats’ votes in 2022, Catalist found, far more than their overall share (30 percent) of the electorate.
The inexorable long-term trajectory is for the diverse younger generations to increase their share of the vote while the mostly white older cohorts recede. In 2024, Millennials and Gen Z may, for the first time, cast as many ballots as the Baby Boomers and older generations; by 2028, they will almost certainly surpass the older groups. In the fight over the federal budget and debt ceiling—just as in the struggles over cultural issues unfolding in the states—Republicans appear to be racing to lock into law policies that favor their older, white base before the rising generations acquire the electoral clout to force a different direction.
Ronald Brownstein
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Biden describes debt-ceiling meeting as ‘productive,’ but McCarthy says he ‘didn’t see any new movement’
House Speaker Kevin McCarthy on Tuesday said he “didn’t see any new movement” toward ending Washington’s standoff over the debt ceiling, as he assessed how a much-anticipated meeting on the issue went.
President Joe Biden hosted the meeting at the White House with the country’s four top lawmakers, and beforehand analysts had predicted it would not result in a deal.
McCarthy…
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Debt-ceiling deal not looking likely yet as Biden meets with McCarthy and other lawmakers
As President Joe Biden prepares to host a much-anticipated meeting on the U.S. debt ceiling with the country’s four top lawmakers, analysts are predicting there won’t be a deal yet on this issue.
If the meeting at the White House, scheduled for around 4 p.m. Eastern time Tuesday, were to conclude with an agreement, that would be very surprising, said Chris Krueger, managing director at TD Cowen’s Washington Research Group, in a note on Tuesday.
The…
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A.I. trade is leaving investors vulnerable to painful losses: Evercore
The artificial intelligence trade may be leaving investors vulnerable to significant losses.
Evercore ISI’s Julian Emanuel warns Big Tech concentration in the S&P 500 is at extreme levels.
“The AI revolution is likely quite real, quite significant. But… these things unfold in waves. And, you get a little too much enthusiasm and the stocks sell off,” the firm’s senior managing director told CNBC’s “Fast Money” on Monday.
In a research note out this week, Emanuel listed Microsoft, Apple, Amazon, Nvidia and Alphabet as concerns due to clustering in the names.
“Two-thirds [of the S&P 500 are] driven by those top five names,” he told host Melissa Lee. “The public continues to be disproportionately exposed.”
Emanuel reflected on “odd conversations” he had over the past several days with people viewing Big Tech stocks as hiding places.
“[They] actually look at T-bills and wonder whether they’re safe. [They] look at bank deposits over $250,000 and wonder whether they’re safe and are putting money into the top five large-cap tech names,” said Emanuel. “It’s extraordinary.”
It’s particularly concerning because the bullish activity comes as small caps are getting slammed, according to Emanuel. The Russell 2000, which has exposure to regional bank pressures, is trading closer to the October low.
For protection against losses, Emanuel is overweight cash. He finds yields at 5% attractive and plans to put the money to work during the next market downturn. Emanuel believes it will be sparked by debt ceiling chaos and a troubled economy over the next few months.
“You want to stay in the more defensive sectors. Interestingly enough with all of this AI talk, health care and consumer staples have outperformed since April 1,” Emanuel said. “They’re going to continue outperforming.”
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Aussie dollar, bond yields surge after central bank’s surprise rate hike
Australian government bond prices plunged and the country’s currency surged after the central bank surprised markets on Tuesday with another rate hike.
The Reserve Bank of Australia raised its benchmark borrowing costs by 25 basis points to 3.85% after traders had expected no move.
The RBA said inflation, which is running at an annual rate…
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Wall Street to Jerome Powell: We don’t believe you
Do you want the good news about the Federal Reserve and its chairman Jerome Powell, the other good news…or the bad news?
Let’s start with the first bit of good news. Powell and his fellow Fed committee members just hiked short-term interest rates another 0.25 percentage points to 4.75%, which means retirees and other savers are getting the best savings rates in a generation. You can even lock in that 4.75% interest rate for as long as five years through some bank CDs. Maybe even better, you can lock in interest rates of inflation (whatever it works out to be) plus 1.6% a year for three years, and inflation (ditto) plus nearly 1.5% a year for 25 years, through inflation-protected Treasury bonds. (Your correspondent owns some of these long-term TIPS bonds—more on that below.)
The second bit of good news is that, according to Wall Street, Powell has just announced that happy days are here again.
The S&P 500
SPX,
+1.05%
jumped 1% due to the Fed announcement and Powell’s press conference. The more volatile Russell 2000
RUT,
+1.49%
small cap index and tech-heavy Nasdaq Composite
COMP,
+2.00%
both jumped 2%. Even bitcoin
BTCUSD,
+1.00%
rose 2%. Traders started penciling in an end to Federal Reserve interest rate hikes and even cuts. The money markets now give a 60% chance that by the fall Fed rates will be lower than they are now.It feels like it’s 2019 all over again.
Now the slightly less good news. None of this Wall Street euphoria seemed to reflect what Powell actually said during his press conference.
Powell predicted more pain ahead, warned that he would rather raise interest rates too high for too long than risk cutting them too quickly, and said it was very unlikely interest rates would be cut any time this year. He made it very clear that he was going to err on the side of being too hawkish than risk being too dovish.
Actual quote, in response to a press question: “I continue to think that it is very difficult to manage the risk of doing too little and finding out in 6 or 12 months that we actually were close but didn’t get the job done, inflation springs back, and we have to go back in and now you really do have to worry about expectations getting unanchored and that kind of thing. This is a very difficult risk to manage. Whereas…of course, we have no incentive and no desire to overtighten, but if we feel that we’ve gone too far and inflation is coming down faster than we expect we have tools that would work on that.” (My italics.)
If that isn’t “I would much rather raise too much for too long than risk cutting too early,” it sure sounded like it.
Powell added: “Restoring price stability is essential…it is our job to restore price stability and achieve 2% inflation for the benefit of the American public…and we are strongly resolved that we will complete this task.”
Meanwhile, Powell said that so far inflation had really only started to come down in the goods sector. It had not even begun in the area of “non-housing services,” and these made up about half of the entire basket of consumer prices he’s watching. He predicts “ongoing increases” of interest rates even from current levels.
And so long as the economy performs in line with current forecasts for the rest of the year, he said, “it will not be appropriate to cut rates this year, to loosen policy this year.”
Watching the Wall Street reaction to Powell’s comments, I was left scratching my head and thinking of the Marx Brothers. With my apologies to Chico: Who you gonna believe, me or your own ears?
Meanwhile, on long-term TIPS: Those of us who buy 20 or 30 year inflation-protected Treasury bonds are currently securing a guaranteed long-term interest rate of 1.4% to 1.5% a year plus inflation, whatever that works out to be. At times in the past you could have locked in a much better long-term return, even from TIPS bonds. But by the standards of the past decade these rates are a gimme. Up until a year ago these rates were actually negative.
Using data from New York University’s Stern business school I ran some numbers. In a nutshell: Based on average Treasury bond rates and inflation since the World War II, current TIPS yields look reasonable if not spectacular. TIPS bonds themselves have only existed since the late 1990s, but regular (non-inflation-adjusted) Treasury bonds of course go back much further. Since 1945, someone owning regular 10 Year Treasurys has ended up earning, on average, about inflation plus 1.5% to 1.6% a year.
But Joachim Klement, a trustee of the CFA Institute Research Foundation and strategist at investment company Liberum, says the world is changing. Long-term interest rates are falling, he argues. This isn’t a recent thing: According to Bank of England research it’s been going on for eight centuries.
“Real yields of 1.5% today are very attractive,” he tells me. “We know that real yields are in a centuries’ long secular decline because markets become more efficient and real growth is declining due to demographics and other factors. That means that every year real yields drop a little bit more and the average over the next 10 or 30 years is likely to be lower than 1.5%. Looking ahead, TIPS are priced as a bargain right now and they provide secure income, 100% protected against inflation and backed by the full faith and credit of the United States government.”
Meanwhile the bond markets are simultaneously betting that Jerome Powell will win his fight against inflation, while refusing to believe him when he says he will do whatever it takes.
Make of that what you will. Not having to care too much about what the bond market says is yet another reason why I generally prefer inflation-protected Treasury bonds to the regular kind.
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‘Recession is what everyone is betting on’: 2023’s first trading day begins
In the first trading day of the new year, U.S. financial markets were bogged down by the almost universal view that a recession is approaching.
A stocks rally fizzled out within the first 30 minutes of opening gains. Gold, a traditional safe haven, touched its highest level in six months, rising alongside silver and platinum. And 10- to 30-year Treasury yields, nestled in what’s known as the long end of the bond market, fell as investors jumped into government bonds — driving those yields down respectively to around 3.8% and 3.9%.
At the heart of the market moves was the strong sense that an economic downturn is all but inevitable at this point, following months of central bank interest rate hikes around the world — with the International Monetary Fund‘s chief Kristalina Georgieva warning that the economies of the U.S., European Union and China are all slowing simultaneously. Scion Asset Management founder Michael Burry said he expects another “inflation spike” after recession rocks the U.S., and former New York Fed President William Dudley said a U.S. economic downturn “is pretty likely.”
Read: Stock-market investors face 3 recession scenarios in 2023
“Recession is what everyone is betting on,” said Ben Emons, senior portfolio manager and head of fixed income/macro strategy at NewEdge Wealth in New York. “And, the thinking is, therefore inflation will decelerate faster than what people anticipate and the Federal Reserve could move quicker to a rate cut. But the whole narrative of a recession is something that’s bothering the stock market and other asset classes because it will mean shrinking margins and earnings.”
Indeed, a much-hoped for rally in stocks around this time of the year, known as the “Santa Claus rally,” is failing to materialize, with just one more trading session left on Wednesday before the end of that seasonal period. The in-house research arm of BlackRock Inc., the world’s largest asset manager, described recession as “foretold” on Tuesday and said it is “tactically underweight” developed-market stocks, which are still “not pricing the recession we see ahead.” That’s the case even though global stocks ended 2022 down by 18% and bonds fell 16%, said Jean Boivin, head of the BlackRock Investment Institute, and others.
Sources: BlackRock Investment Institute, Refinitiv, Bloomberg.
“We see stock rallies built on hopes for rapid rate cuts fizzling. Why? Central banks are unlikely to come to the rescue in recessions they themselves caused to bring inflation down to policy targets. Earnings expectations are also still not fully reflecting recession, in our view. But markets are now pricing in more of the damage we see – and as this continues, it would pave the way for us to turn more positive on risk assets,” Boivin and others at BlackRock Investment Institute wrote in a note Tuesday.
“Even with a recession coming, we think we are going to be living with inflation,” they said.
Interestingly, the financial market’s focus on a 2023 recession is being accompanied by the view that such a downturn will help cure inflation, allowing central banks to end, slow, or even reverse their monetary policy-tightening campaigns. That view was buttressed by Tuesday’s release of inflation data out of Germany, which showed that the annual rate from the consumer price index fell by more than expected in December to a four-month low. Back in the U.S., fed funds futures traders priced in a greater likelihood of a smaller-than-usual, 25-basis point rate hike by the Federal Reserve in February.
As of Tuesday afternoon, all three major U.S. stock indexes DJIA SPX were down, led by a 1.3% drop in the Nasdaq Composite.
Meanwhile, a rally in Treasurys moderated relative to earlier in the day. The 10-year Treasury yield
TMUBMUSD10Y,
3.785% ,
a benchmark for borrowing costs, dropped back to levels last seen around Dec. 23-26, a period when conditions were “totally illiquid and no one was trading,” said Emons of NewEdge Wealth. -
U.S. stocks edge higher, aiming to end four-day skid as Bank of Japan policy surprise adds to jitters
U.S. stocks turned higher at midday Tuesday, as investors gauged whether the recent losing streak in equities has been overdone. Traders also weighed the potential rippled effects of the Bank of Japan’s surprise announcement to put a higher ceiling on government bond yields.
How are stocks are trading
-
The S&P 500
SPX,
+0.45%
rose 9 points, or 0.2%, to 3,814. -
The Dow Jones Industrial Average
DJIA,
+0.63%
was up 114 points, or 0.3%, at 32,866. -
The Nasdaq Composite
COMP,
-1.76%
was up 26 points, or 0.2%, to 10,578.
Stocks fell for a fourth straight session on Monday. The Nasdaq Composite was down 6.3% over that stretch, and has retreated 32.6% so far this year.
What’s driving markets
Wall Street is looking to avoid a fifth straight losing session, while investors weighed the implications of a surprise monetary policy shift by the Bank of Japan.
The S&P 500 closed the previous day near a six-week low as concerns intensify that central banks’ hiking of borrowing costs to combat inflation will push economies into recession and cause corporate earnings to fall.
The Bank of Japan had been an outlier among major central banks by having maintained rates at the zero lower bound, while others embarked on their biggest tightening cycle in a generation, noted Henry Allen, strategist at Deutsche Bank.
But on Tuesday the BoJ doubled the cap on the country’s 10-year bond, from 0.25% to 0.5%, causing the yen to jump more than 3%, while whacking equities in the region and giving U.S. stock investors more to consider.
See: Why the Bank of Japan’s surprise policy twist is rattling global markets
The BoJ kept its short-term interest rate at minus 0.1%, but the raising of the yield at which it will allow bonds to trade was seen as a step towards the ending of its era of ultra-loose monetary policy. The Nikkei 225
NIK,
-2.46%
fell 2.5%.“It’s important not to underestimate the impact this could have, because tighter BoJ policy would remove one of the last global anchors that’s helped to keep borrowing costs at low levels more broadly,” Allen added.
The 10-year U.S. Treasury yield
TMUBMUSD10Y,
3.692%
stood at 3.685% as the equivalent maturity Japanese government bond
TMBMKJP-10Y,
0.417%
climbed to 0.418%.However, some analysts argued that recent drops in U.S. stocks were starting to go too far.
“I think we’ve been oversold the last couple weeks,” Joe Saluzzi, partner at Themis Trading, said in a phone interview. There’s the macroeconomic pressures weighing on stocks, but Saluzzi said the recent run of heavy selling may also be partly attributable to year-end tax loss harvesting in order to reap tax benefits from the year’s losses.
The Bank of Japan announcement may have unsettled some early trading, he said. But ultimately, there’s just one central bank in the mind of U.S. equity investors, Saluzzi noted.
Until the Federal Reserve is clear that its own interest rate hikes are complete, markets will be choppy, Saluzzi said. “The economy is weakening. No matter what the Fed said, they are not going to be doing much more,” he said.
“U.S. equity markets remain trending lower in the short run, but are close to near-term support which should materialize between 12/21-12/23 at marginally lower levels,” wrote Mark Newton, head of technical strategy at Fundstrat, in a note to clients.
“The percentage of stocks above their 20-day moving average is nearing single-digit territory, which normally provides relief for longs. Overall, I don’t expect markets to go down much further in December, and risk/reward for trading shorts looks sub-par with SPX not far above targets at 3,725.
“This might materialize at 3775-3800 before allowing for a minor bounce, and then retest into Wednesday-Friday. However, I’m fully expecting a bounce next week into year-end, regardless if it proves temporary,” Newton concluded.
Tuesday morning data gave another window to a slowing economy. Building permits and housing starts were both down in November.
Companies in focus
-
3M Co.
MMM,
-0.34%
is phasing out the manufacturing of so-called “forever chemicals” like fluoropolymers, fluorinated fluids, and PFAS-based additive products by the end of 2025. The phase-out process will include taking mostly non-cash charges of $1.3 billion to $2.3 billion to exit the line of business. Shares are down 0.5% in mid-morning trading. -
Wells Fargo & Co.
WFC,
-1.06%
is being ordered to pay a civil penalty of $1.7 billion and return more than $2 billion to consumers, according to the Consumer Financial Protection Bureau. The regulator said the fines and consumer redress are connected to “widespread mismanagement” of auto loans, mortgages and deposit accounts, the CFPB said. Shares were off 1.1% in mid-morning trading.
-
The S&P 500
-
El Salvador to repurchase more of its debt
SAN SALVADOR, El Salvador — El Salvador’s government announced Tuesday that it will make a second buyback of its sovereign debt bonds maturing in 2023 and 2025 as it tries to calm market concerns that it could default on its debt.
The government set the maximum for the repurchase at $74 million. The 2023 and 2025 bond offerings were $800 million each.
In September, the government bought back $565 million of those bonds.
President Nayib Bukele said via Twitter that the September repurchase “was so successful that we have decided to launch ANOTHER OFFER for the remainder of the 2023 and 2025 bonds.”
The debt was issued by previous administrations in 1999 and 2004.
El Salvador last year became the first country to make the cryptocurrency bitcoin legal tender, drawing criticism from international lenders. The International Monetary Fund asked the government to reverse that decision, but Bukele dismissed the request and said the country would issue bonds denominated in bitcoin, something that has still not happened a year later.
Bukele’s government has also invested heavily in bitcoin, which has since plummeted in value.
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Japan Cabinet OKs $200B spending plan to counter inflation
TOKYO — Japanese Prime Minister Fumio Kishida’s government approved Friday a hefty economic package that will include government funding of about 29 trillion yen ($200 billion) to soften the burden of costs from rising utility rates and food prices.
Kishida was set to give a news conference in the evening.
Inflation has been rising in Japan along with globally surging prices. A weakening of the yen against the dollar has amplified costs for imports.
The stimulus package includes subsidies for households that are largely seen as an attempt by Kishida to lift his plunging popularity. His government has been rocked by the ruling Liberal Democratic Party’s close ties to the South Korean-based Unification church, which surfaced after the assassination of former leader Shinzo Abe in July.
“We will make sure to deliver the measures to everyone and do our utmost so that people can feel supported in their daily lives,” Kishida said after preliminary approval of the package earlier in the day.
Any market reaction to another flood of stimulus was likely already taken into account earlier in the week as share prices fell in Tokyo, with the benchmark Nikkei 225 losing 0.9% to 27,105.20.
Japan has stuck to using fiscal measures, or government spending, to counter current economic challenges. While central banks around the world are raising interest rates aggressively to try to tame decades-high inflation, Japan’s inflation rate is a relatively moderate 3% and the greater fear is that the economy will stall, not overheat.
The Bank of Japan, which has kept its benchmark rate at minus 0.1% since 2016, kept its longstanding lax monetary policy at a policy making meeting that wrapped up on Friday.
In doing so, it runs the risk of seeing the yen weaken further since the Federal Reserve is still raising rates, which tends to push the dollar higher. That in turn will raise prices in Japan since it imports much of what it consumes.
The overall size of the package, including private-sector funding and fiscal measures, is expected to amount to 71.6 trillion yen ($490 trillion), Kishida said.
The plan includes about 45,000 yen ($300) subsidies for household electricity and gas bills and coupons worth 100,000 yen ($680) for women who are pregnant or rearing babies.
The 29 trillion yen ($200 billion) spending package will be part of a supplementary budget that still must be approved by the parliament.
Kishida vowed to compile and submit a budget plan and get it approved as soon as possible.
His support ratings have sunk since July amid public criticisms over his Liberal Democratic Party’s longstanding cozy ties with the Unification Church, which is accused of brainwashing adherents into making huge donations, causing financial hardships and breaking up families.
An LDP internal survey showed about half of its 400 lawmakers were tied to the church, though not as followers. Kishida’s economy minister, Daishiro Yamagiwa, was obliged to resign earlier this week because of his ties with the church and failure to explain them. He was replaced by former health minister Shigeyuki Goto.
The hefty spending package will require issuing of more government bonds, further straining Japan’s worsening national debt that has piled up as the government spent heavily to counter the impact of the pandemic. Japan now has a long-term debt exceeding 1.2 quadrillion yen ($8.2 trillion), or more than 200% of the size of its economy.
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Asia stocks mixed after Wall St rises on corporate profits
BEIJING — Asian stock markets were mixed Wednesday after Wall Street rose on strong corporate profit reports.
Tokyo advanced while Shanghai and Hong Kong declined. The yen stayed near a two-decade low near 149 to the dollar. Oil prices gained.
Wall Street’s benchmark S&P 500 index rose 1.1% on Tuesday after investment bank Goldman Sachs, military contractor Lockheed Martin and others reported strong results.
Market sentiment is “looking positive so far amid forecast-beating earnings,” said Anderson Alves of ActivTrades in a report.
The profit reports helped at least temporarily offset investor worries that repeated interest rate hikes by U.S., European and Asian central banks to control inflation that is at multi-decade highs might tip the global economy into recession.
That concern has helped to drag U.S. stocks into a bear market, or a decline of more than 20% by the S&P 500 from its January high.
The Nikkei 225 in Tokyo gained 0.7% to 27,353.87 while the Shanghai Composite Index lost 0.3% to 3,072.85. The Hang Seng in Hong Kong lost 0.9% to 16,766.79.
The Kospi in Seoul added less than 0.1% to 2,251.88 and Sydney’s S&P-ASX 200 advanced 0.4% to 6,807.80. New Zealand and Southeast Asian markets advanced.
On Wednesday, the S&P 500 gained 3,719.98 as 90% of the stocks in the index rose.
The Dow Jones Industrial Average rose 1.1% to close at 30,523.80. The Nasdaq composite advanced 0.9% to 10,772.40.
With no major economic data releases planned this week, investors focused on corporate earnings.
Goldman Sachs rose 2.3%, which helped to lift other lenders. Lockheed Martin jumped 8.7%, giving other military-related stocks a boost. General Dynamics rose 3.8%, Northrop Grumman gained 6.7% and Raytheon Technologies added 3.4%.
Johnson & Johnson slipped 0.3% after reporting solid financial result s but a narrowed forecast as it deals with a strong dollar cutting into sales outside the United States.
American Airlines, Union Pacific and American Express also report results this week.
In energy markets, benchmark U.S. crude rose 99 cents to $83.06 per barrel in electronic trading on the New York Mercantile Exchange. Brent crude, the price basis for international oil trading, advanced 66 cents to $90.69 per barrel in London.
The dollar eased to 149.16 yen from Tuesday’s 149.21 yen. The euro rose to 98.52 cents from 98.50 cents.
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UK leader in peril after Treasury chief axes ‘Trussonomics’
LONDON — The U.K.’s new Treasury chief ripped up the government’s economic plan on Monday, dramatically reversing most of the tax cuts and spending plans that new Prime Minister Liz Truss announced less than a month ago. The move raises more questions about how long the beleaguered British leader can stay in office, though Truss insisted she has no plans to quit.
Chancellor of the Exchequer Jeremy Hunt, said he was scrapping “almost all” of Truss’ tax cuts, along with her flagship energy policy and her promise — repeated just last week — that there will be no public spending cuts.
While the reversal of policy calmed financial markets and helped restore the government’s economic credibility, it further undermined the prime minister’s rapidly crumbling authority and fueled calls for her to step down before her despairing Conservative Party forces her out.
Truss declined to attend the House of Commons to answer a question on the economy from the leader of the opposition, sending House of Commons leader Penny Mordaunt in her place. Mordaunt denied a lawmaker’s suggestion that Truss was “cowering under her desk” to avoid scrutiny.
“The prime minister is not under a desk,” Mordaunt said, words hardly likely to inspire confidence in the leader who only came to power last month.
Truss’ spokesman said the prime minister and Hunt had jointly agreed on the economic changes. But Hunt told Conservative lawmakers that Truss “backed him to the hilt in making difficult decisions” — suggesting he has a free hand to make policy.
With Truss sitting silently beside him, Hunt told lawmakers that he was canceling Truss’ plan to reduce the basic rate of income tax by 1 percentage point and most of her other libertarian economic policies. In a message aimed squarely at reassuring the financial markets, he said Britain was “a country that funds our promises and pays our debts.”
“And when that is questioned, as it has been, this government will take the difficult decisions necessary to ensure there is trust and confidence in our national finances,” Hunt said.
Hunt was appointed Friday after Truss fired his predecessor Kwasi Kwarteng, who spent less than six weeks in the Treasury job. Hunt is seeking to restore the Conservative government’s credibility for sound fiscal policy after Truss and Kwarteng rushed out a plan for tax cuts without detailing how they would pay for them.
Truss and Kwarteng jointly came up with a Sept. 23 announcement of 45 billion pounds ($50 billion) in unfunded tax cuts that immediately spooked the financial markets. The cuts fueled investor concerns about unsustainable levels of government borrowing, which pushed up government borrowing costs, raised home mortgage costs and sent the pound plummeting to an all-time low against the dollar. The Bank of England was forced to intervene to protect pension funds, which were squeezed by volatility in the bond market.
Over the weekend, Hunt has been dismantling that economic plan. The government had already ditched parts of its tax-cutting plan and announced it would make a medium-term fiscal statement on Oct. 31, weeks earlier than previously scheduled.
On Monday, Hunt went further. He scaled back a cap on energy prices designed to help households pay their bills. It will now be reviewed in April rather than lasting two years — sweeping away one of Truss’ signature plans to help Britons facing a cost-of-living crisis as food, fuel and mortgage prices soar.
Hunt told lawmakers that the measures he announced would save 32 billion pounds a year, but that spending cuts were also coming.
“There remain, I’m afraid, many difficult decisions to be announced” in the fuller budget statement on Oct. 31, he said.
Hunt also said he was setting up a new Economic Advisory Council of economists and investment bankers to help inform policy — a far cry from Truss’ bid to throw out economic “orthodoxy.”
The pound rose more than 1% to above $1.13 in London after Hunt’s announcements. That pushed the U.K. currency back above where it was trading on Sept. 22, the day before Kwarteng announced the tax cuts.
Yields on 10-year government bonds, an indicator of government borrowing costs, fell to 3.947% from 4.327% on Friday. It was 3.495% on Sept. 22. Bond yields tend to rise as the risk of a borrower defaulting increases.
Paul Johnson, director of the Institute for Fiscal Studies think tank, said Monday’s announcements would not be enough “to undo the damage caused by the debacle of the last few weeks. But they are big, welcome, clear steps in the right direction.”
The financial fiasco has turned Truss into a lame-duck prime minister. She took office just six weeks ago after winning a party election to replace Prime Minister Boris Johnson, who was forced out in July after ethics scandals ensnared his administration. Many Conservatives now believe their only hope is to replace Truss — but they are divided about who should take over.
In a BBC interview, Truss conceded that she had made mistakes. But, she vowed, “I will lead the Conservatives into the next general election.”
Few believe that possible. The Conservative Party still commands a large majority in Parliament, and — in theory — has two years until a national election must be held. Polls suggest holding an election now would be a wipeout for the Tories, with the Labour Party winning a big majority.
Labour Party economics spokeswoman Rachel Reeves said Truss was “barely in office, and she is certainly not in power,” and claimed the Conservatives could not fix the problems they had caused.
“The truth is an arsonist is still an arsonist, even if he runs back into the burning building with a bucket of water,” she said.
Chris Beauchamp, chief market analyst at online trading firm IG, said the markets were reassured by the presence of Hunt, a former U.K. foreign secretary and health chief.
“I think markets in some ways would rather things just stayed as they are for a while,” he said. “OK, the PM has found her authority quite truncated. But at least you’ve got the chancellor in place almost running the country.
“I think they’re quite content with that slightly odd state of affairs, for the moment.”
———
Jo Kearney contributed to this story.
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‘Material risk’ looms over stocks as investors face bear market’s ‘second act,’ warns Morgan Stanley
Stock-market investors have been adjusting to the jump in interest rates amid high inflation, but they have yet to cope with profit headwinds faced by the S&P 500, according to Morgan Stanley Wealth Management.
“While a rate peak may solidify estimates for the equity risk premium and valuation multiples, equity investors still face the bear market’s second act — the earnings outlook,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a note Monday.
“They have been slow to recognize that pricing power and operating margins, which hit all-time highs in the past two years, are unsustainable,” she said. “Even without a recession, the mean reversion of profits in 2023 translates to a 10%-to-15% decline from current estimates.”
MORGAN STANLEY WEALTH MANAGEMENT NOTE DATED OCT. 17 2022
Unprecedented monetary and fiscal stimulus during the throes of the pandemic had led to the largest U.S. companies booking record operating margins that were 150 to 200 basis points above norms seen in the past decade, according to Shalett.
See: Stock market’s wild gyrations put earnings in focus as inflation crushes Fed ‘pivot’ hopes
She said that company profits may now be imperiled by slowing growth, with “demand skewing toward services” after pulling forward toward goods earlier in the pandemic, and a likely reversal in “extremely strong” pricing power as the Fed fights surging inflation with interest-rate hikes.
“Such risks are not discounted in 2023 consensus yet, constituting a material risk to stocks for the remainder of the year,” Shalett said.
While many sectors have discounted the potential drop in 2023 profits from current estimates that could stir headwinds even with no recession, “the megacap secular growth stocks that dominate market-cap indexes have not,” she warned. “And those indexes are where risk gets repriced in the bear market’s final stages.”
Morgan Stanley’s chief U.S. equity strategist Mike Wilson estimates as much as 11% downside from consensus estimates, with his base-case, earnings-per-share forecast for the S&P 500 for 2023 being $212, according to Shalett’s note.
U.S. stocks were bouncing Monday, with major stock benchmarks trading sharply higher in the afternoon, after sinking Friday amid inflation concerns as earnings season got under way. The S&P 500
SPX,
+2.65%
was up 2.7% in afternoon trading, while the Dow Jones Industrial Average
DJIA,
+1.86%
gained 1.9% and the technology-heavy Nasdaq Composite surged 3.5%, FactSet data show, last check.In the bond market, Treasury rates were trading slightly lower Monday afternoon, after the 2-year yield hit a 15-year high and the 10-year yield notched a 14-year high on Friday, according to Dow Jones Market Data. Two-year yields ended last week at 4.507%, the highest level since August 8, 2007 based on 3 p.m. Eastern time levels, while the 10-year rate climbed to 4.005% for its highest rate since Oct. 15, 2008.
The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.992%
was down about 1 basis point Monday afternoon at around 4%, while two-year yields
TMUBMUSD02Y,
4.439%
fell about five basis points to around 4.45%, FactSet data show, at last check.Meanwhile, as investors capitulated to higher inflation, “peak policy rates moved up aggressively in the fed funds futures market, with the terminal rate now at nearly 5%, an aggressive stance that smacks of ‘peak hawkishness,’” according to the Morgan Stanley note.
“Critically, although the market is still pricing 1.5 cuts in 2023, the January 2024 fed-funds rate is estimated at 4.5%, a comfortable 100 basis points above our forecast” for core inflation measured by the consumer-price index, Shalett wrote.
“Consider locking in solid short-term yields in bonds and shoring up positions in high growth, dividend-paying stocks,” she said. “Short-duration Treasuries look attractive, especially because the yield is more than 2.5 times that of the dividend yield on the S&P 500.”
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US starts fiscal year with record $31 trillion in debt
WASHINGTON — The nation’s gross national debt has surpassed $31 trillion, according to a U.S. Treasury report released Tuesday that logs America’s daily finances.
Edging closer to the statutory ceiling of roughly $31.4 trillion — an artificial cap Congress placed on the U.S. government’s ability to borrow — the debt numbers hit an already tenuous economy facing high inflation, rising interest rates and a strong U.S. dollar.
And while President Joe Biden has touted his administration’s deficit reduction efforts this year and recently signed the so-called Inflation Reduction Act, which attempts to tame 40-year high price increases caused by a variety of economic factors, economists say the latest debt numbers are a cause for concern.
Owen Zidar, a Princeton economist, said rising interest rates will exacerbate the nation’s growing debt issues and make the debt itself more costly. The Federal Reserve has raised rates several times this year in an effort to combat inflation.
Zidar said the debt “should encourage us to consider some tax policies that almost passed through the legislative process but didn’t get enough support,” like imposing higher taxes on the wealthy and closing the carried interest loophole, which allows money managers to treat their income as capital gains.
“I think the point here is if you weren’t worried before about the debt before, you should be — and if you were worried before, you should be even more worried,” Zidar said.
The Congressional Budget Office earlier this year released a report on America’s debt load, warning in its 30-year outlook that, if unaddressed, the debt will soon spiral upward to new highs that could ultimately imperil the U.S. economy.
In its August Mid-Session Review, the administration forecasted that this year’s budget deficit will be nearly $400 billion lower than it estimated back in March, due in part to stronger than expected revenues, reduced spending, and an economy that has recovered all the jobs lost during the multi-year pandemic.
In full, this year’s deficit will decline by $1.7 trillion, representing the single largest decline in the federal deficit in American history, the Office of Management and Budget said in August.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget said in an emailed statement Tuesday, “This is a new record no one should be proud of.”
“In the past 18 months, we’ve witnessed inflation rise to a 40-year high, interest rates climbing in part to combat this inflation, and several budget-busting pieces of legislation and executive actions,” MacGuineas said. “We are addicted to debt.”
A representative from the Treasury Department was not immediately available for comment.
Sung Won Sohn, an economics professor at Loyola Marymount University, said “it took this nation 200 years to pile up its first trillion dollars in national debt, and since the pandemic we have been adding at the rate of 1 trillion nearly every quarter.”
Predicting high inflation for the “foreseeable future,” he said, “when you increase government spending and money supply, you will pay the price later.”
