Big, Beautiful Bill Builds Contrarian Case For Bonds
The 'big, beautiful bill' has turned into a bitter pill for bonds. As you've undoubtedly heard, bond buyers aren't exactly thrilled about lending more money to a $36 trillion debtor that's digging itself deeper into a financial ditch.
Prior to the proposed 'One Big Beautiful Bill Act' (OBBBA), the Congressional Budget Office (CBO)—famous for crunching numbers through rose-colored glasses—already projected a $1.9 trillion deficit for 2025. Now, the CBO estimates that the current House-passed version of OBBBA will add an extra $3.8 trillion to the national debt over the next decade.
This leaves Uncle Sam staring into a $40 trillion hole, deepening by roughly $2 trillion each year.
Treasury bond yields spiked recently as buyers vanished. Last Wednesday, a seven-week stock rally reversed midday when the U.S. struggled through a weak $16 billion auction of 20-year bonds. The tepid demand for these long-dated Treasuries confirmed what many already thought—with Uncle Sam spending like a drunken sailor, who'd lend him more?
Thus, the popular mainstream conclusion: The U.S. has entered its final 'doom loop' debtor stage. Rates are rising as bond investors demand higher compensation to offset the credit risk posed by Uncle Sam's ugly finances (you know, $40 trillion…).
Higher rates increase the country's financing costs, which worsens the debt situation, which leads investors to demand even higher rates, and so forth. This implies we should avoid bonds entirely.
To borrow a concept from billionaire investment manager Howard Marks, this is a 'first level' interpretation. It is accurate on paper but misses the nuances.
In a truly free market, the 'bond doom loop' narrative would be valid. But in the real world that you and I inhabit, my fellow contrarians, we must elevate our thinking to the second level for more nuanced consideration.
Here, we recognize the 'Quiet QE' the U.S. Treasury began under then-Secretary Janet Yellen. She subtly influenced the bond market by issuing short-term debt rather than long-dated Treasuries. This maneuver reduced the supply of long-term bonds, thereby suppressing long-term yields. (The same number of buyers chased fewer long-dated bonds, pushing prices higher and yields lower.)
This strategic pivot was significant. At the end of 2019, short-term bills represented just 15% of marketable U.S. debt. By 2024, Yellen funded 75% of the deficit via the short end of the yield curve.
Two summers ago at Contrarian Outlook, we identified this Quiet QE interplay between Yellen and Fed Chair Jay Powell. Renowned economist Nouriel Roubini published a paper 12 months later identifying this 'activist Treasury issuance' (ATI) as Uncle Sam's favorite plumbing tweak.
Roubini confirmed the U.S. Treasury is, shall we say, finessing debt issuance to nudge longer-term rates lower than they'd naturally be. Without ATI, the 10-year Treasury yield would be 30 to 50 basis points higher—equivalent to up to two rate hikes in the Fed Funds rate.
In other words, the 10-year yield would top 5% today if not for Quiet QE. And the cost of borrowing for business (lending rates) and individuals (mortgage rates) would be notably higher.
Current Treasury Secretary Scott Bessent publicly criticized this tactic but has quietly continued it. Year-to-date, the Treasury has financed 80% of its funding needs through short-term issuance. If we witness more weak auctions like last week's, Bessent could very well lean even harder into lower cost short-term borrowing.
Short-term rates are influenced primarily by the Federal Reserve rather than the broader bond market. And Jay Powell's term ends in less than a year, when President Trump will likely appoint an ally like Kevin Warsh, Kevin Hassett, or Judy Shelton, who will cooperate with the administration to lower the Fed Funds rate.
A lower Fed rate will in turn reduce short-term Treasury yields. With 80% of issuance short term, this will significantly lower debt-service costs. In fact, this is already happening. Fellow financial author Mel Mattison notes that total interest on the public debt is declining year-over-year despite a ballooning deficit!
Mel reminds us that Powell didn't start cutting the Fed Funds Rate until last September. So, this fall the decline in interest payments will really start showing up in the year-over-year data. More evidence against the case of the 'interest rate doom loopers.'
Does this fix the giant US debt problem? Of course not. But Mel's point is that our politicians and central bankers have 'creative options' at their disposal. Vanilla investors tend to glance at the surface and move on. But we careful contrarians appreciate the nuances and gear our income portfolios accordingly.
The somewhat-secret swap to short-term debt should bring a ceiling on long-term yields. Bessent, after all, is not going to tolerate a higher 10-year yield that boosts interest on the debt. He wants a cap on long rates, which will provide a floor beneath the bond market. He'll get one by limiting long-dated bond supply.
Viewed through this lens, our DoubleLine bond funds look attractive here. If long rates are near a high watermark, then the prices of the paper owned by DoubleLine will enjoy a yield-driven tailwind. DoubleLine Yield Opportunities Fund (DLY) yields 9.1% and trades at a 2% discount to its net asset value (NAV), while DoubleLine Income Solutions Fund (DSL) pays an 11% yield and trades at par.
Doubleline CEFs
Contrarian Outlook
These two bond portfolios are also supported by a strengthening economy. The negative first-quarter GDP print was likely the most bullish development for the real economy. Trump and Bessent will make sure we don't experience negative GDP growth in the second quarter.
Consecutive negative quarters would officially signal a recession. They don't want this scarlet letter heading towards the midterms. Trump and Bessent no longer need an economic slowdown to push long-term yields lower—they'll simply work with the short end of the bond market from here.
Political pressure on Powell, the 'lame duck' , will ease. As will pressure on the long end of the curve.
Let's ignore the mainstream Chicken Littles declaring the end of bonds. These 'first level' thinkers overlook the power of coordinated Treasury and Fed policy. Here at Contrarian Outlook we recognize the monetary 'creativity'—and profit from it. Let's keep enjoying these DoubleLine monthly payers yielding up to 11%.
Brett Owens is Chief Investment Strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: How to Live off Huge Monthly Dividends (up to 8.7%) — Practically Forever.
Disclosure: none
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
26 minutes ago
- Yahoo
The GOP's New Medicaid Denialism
Congressional Republicans claim to have achieved something truly miraculous. Their One Big Beautiful Bill Act, they argue, would cut nearly $800 billion from Medicaid spending over 10 years without causing any Americans to lose health care—or, at least, without making anyone who loses health care worse off. The Congressional Budget Office estimates that, by imposing Medicaid work requirements, the bill would eventually increase the uninsured population by at least 8.6 million. At first, Republican officials tried to defend this outcome on the grounds that it would affect only lazy people who refuse to work. This is clearly untrue, however. As voluminous research literature shows, work requirements achieve savings by implementing burdensome paperwork obligations that mostly take Medicaid from eligible beneficiaries, not 25-year-old guys who prefer playing video games to getting a job. Perhaps for that reason, some Republicans in Washington are now making even more audacious claims. On CNN over the weekend, Office of Management and Budget Director Russell Vought insisted that 'no one will lose coverage as a result of this bill.' Likewise, Joni Ernst, a Republican senator from Iowa, recently told voters at a town hall, 'Everyone says that Medicaid is being cut, people are going to see their benefits cut; that's not true.' After one attendee shouted, 'People will die,' Ernst replied, 'We all are going to die,' and later doubled down on her comment on social media, attempting to equate concern that Medicaid cuts could harm people with believing in the tooth fairy. Officials such as Vought and Ernst have not provided a detailed explanation of their blithe assurances. But there is one center of conservative thought that has attempted to defend these claims: the Wall Street Journal editorial page. Last week, it published an editorial headlined 'The Medicaid Scare Campaign.' The thesis is that the Medicaid cuts would 'improve healthcare by expanding private insurance options, which provide better access and health outcomes than Medicaid.' This would be, as they say, huge if true: The GOP has found a way to give low-income Americans better health care while saving hundreds of billions in taxpayer money. The timing is even more remarkable, given that this wondrous solution has come along at precisely the moment when congressional Republicans are desperate for budget savings to partially offset the costs of a regressive and fiscally irresponsible tax cut. Sadly, a close reading of The Wall Street Journal's editorial reveals that no such miracle is in the offing. Instead, the argument relies on a series of misunderstandings and non sequiturs to obscure the obvious fact that cutting Medicaid would make poor people sicker and more likely to die. [Jonathan Chait: The cynical Republican plan to cut Medicaid] The editorial begins by acknowledging a recent study's conclusion that Medicaid expansion under the Affordable Care Act reduced mortality by 2.5 percent among low-income American adults. This would imply that taking Medicaid away from people would cause many of them to die. Not so fast, the editorial insists: 'The 2.5% difference in mortality for low-income adults between the expansion and non-expansion states wasn't statistically significant when disabled adults were included.' The implication is that the lifesaving effect of the Medicaid expansion disappears if you include disabled adults. In fact, Bruce Meyer, a University of Chicago economist and a co-author of the study, told me that the reason the study excluded disabled adults is that they were already eligible for public health insurance before the expansion. The way to measure the effect of a change is to focus on the population that was treated to the change. So either the Wall Street Journal editorial board is misleading its audience intentionally or it does not understand statistics. (Decades of Journal editorials provide ample grounds for both explanations.) The editorial then suggests that Obamacare has not overcome other social factors that are causing people to die: 'What's clear is that the ObamaCare expansion hasn't reduced deaths among lower-income, able-bodied adults. U.S. life expectancy remains about the same as it was in 2014 owing largely to increased deaths among such adults from drug overdoses and chronic diseases.' This passage, like the previous one, is intended to sound like a claim that giving people access to medical care does not reduce their likelihood of suffering a premature death. But that is not really what it's saying. The editorial is merely noting that the drug epidemic and other factors worked against the effects of the Medicaid expansion. Presumably, if the government had started throwing people off their health insurance at the same time that the drug-overdose epidemic was surging, then life expectancy would have gotten even worse. The article goes on to explain that Medicaid reimburses doctors and hospitals at a lower rate than private insurance does. That is absolutely correct: In the United States, Medicaid is the cheapest existing way to give people access to medical care. The editorial laments that Medicaid recipients have worse outcomes than people on private insurance do. But the Republican plan isn't to put Medicaid recipients on private insurance, which would cost money. The plan is to take away even their extremely cheap insurance and leave them with nothing. (Well, not nothing: The editorial notes that the bill would double 'the health-savings account contribution limit to $17,100 from $8,550 for families earning up to $150,000.' For reference, in most states, a four-person household must earn less than $45,000 a year to be eligible for Medicaid.) Finally, the editorial asserts, 'The GOP bill is unlikely to cause many Americans to lose Medicaid coverage.' Here is where I would analyze the editorial's support for this remarkable claim, but there is none. The sentence just floats by itself in a sea of text that bears no relationship to it. Indeed, the editorial doesn't even attempt to explain why the official Congressional Budget Office estimate is dramatically wrong. Nor does it engage with the mountain of evidence showing that people who obtain Medicaid coverage tend, naturally enough, to be better off as a result. The near-universal belief that being able to see a doctor and buy medicine makes you healthier is the kind of presumption that would take extraordinary evidence to refute. The Wall Street Journal editorial offers none at all. Advocates of the House bill have cultivated an aura of condescension toward anybody who states its plain implications. But even the most detailed attempt to substantiate their position consists entirely of deflections and half-truths. If this is the best case that can be made for worrying about the GOP's plan for Medicaid, then Americans should be worried indeed. Article originally published at The Atlantic
CNBC
an hour ago
- CNBC
6 Nobel prize-winning economists wrote a letter opposing Trump's budget bill: 'We have grave concerns'
The multitrillion-dollar tax and spending package House Republicans passed last month is heading to the Senate, with lawmakers hoping to pass a finalized bill by July 4. If passed in its current form, the bill — dubbed the "One Big Beautiful Bill Act" — would, among other measures, make President Donald Trump's 2017 tax cuts permanent and add new tax breaks for tipped and overtime workers as well as older Americans. The bill's critics are hoping it may see some change's in Congress's upper house. Those include six Nobel-prize winning economists, who this week penned an open letter published through the Economic Policy Institute, a nonpartisan think tank. "As economists who have devoted our careers to researching how economies can grow and how the benefits of this growth can be translated into broadly shared prosperity and security, we have grave concerns about the budget reconciliation bill passed by the U.S. House of Representatives on May 22, 2025," the letter says. The economists' main issue: cuts to Medicaid (the federal and state health-care program for low-income and disabled Americans) and the Supplemental Nutrition Assistance Program (formerly known as food stamps), which they see as essential for American families. The House version of the bill would cut Medicaid spending by $700 billion and slash SNAP by $300 billion — the largest cut in either program's history. "These steep cuts to the social safety net are being undertaken to defray the staggering cost of the tax cuts included in the House bill, including the hidden cost of preserving the large corporate income tax cut passed in the 2017 tax law," the letter says. "But even these sharp spending cuts will pay for far less than half of the tax cuts (not even including the cost of maintaining the corporate income tax cuts of the 2017 law)." These and other critics of the bill cite research that estimates the law will add to the national deficit — to tune of about $3 trillion to $5 trillion over the next decade, according to the Committee for a Responsible Federal Budget — while failing to lift up low-income Americans. "Given how much this bill adds to the U.S. debt, it is shocking that it still imposes absolute losses on the bottom 40% of U.S. households," the letter says. It remains to be seen if spending cuts will remain in the bill as-is. "Overall, the [Senate] bill is not going to be that much different," Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, recently told CNBC, but added that he expects "a lot of debate" about the Medicaid provision in particular. One set of provisions — making the tax rates and brackets from the 2017 Tax Cuts and Jobs Act permanent — would maintain the status quo for taxpayers. That law's tax cuts, which were set to expire at the end of the year, included a major hike to the standard deduction, which "greatly simplified the tax code for millions of taxpayers," say analysts at the Tax Foundation. Proponents of the bill say these and other tax cuts will spark U.S. economic growth and laud the administration for delivering on several campaign trail promises. When it comes to cutting spending on social programs, Trump sees the reductions as an exercise in government efficiency. "We don't want any waste, fraud or abuse," he said in a recent Newsmax interview. "Other than that, we're leaving it." The economic Nobelists don't see it that way. "The House bill addresses none of the nation's key economic challenges usefully and exacerbates many of them," they write. "The Senate should refuse to pass this bill and start over from scratch on the budget." ,
Yahoo
an hour ago
- Yahoo
Why This Trump Lackey Knows His Untruths Will Get Caught: MSNBC Host
Treasury Secretary Scott Bessent has been having difficulty defending the Trump administration's poor economic decisions—and it shows, said MSNBC host Stephanie Ruhle on The Daily Beast Podcast. 'Scott Bessent deeply understands economics,' Ruhle, a former Wall Street executive, explained, which 'is why this is so hard for him to justify all of it.' She noted that the hedge fund billionaire 'deeply understands how trade and trade deficit works,' but has now been put in a position that requires him to 'defend a position that's not rooted in truth.' 'One of the reasons he struggles on television is because he's not telling the truth, right?' Ruhle told host Joanna Coles. 'You and I both know being on television is really hard and we're actually reporting the truth. We're speaking facts.' Bessent has, over his years at hedge funds and investment firms, worked with both Republicans and Democrats alike. He had previously donated to Democratic causes, including Al Gore's presidential run in 2000. He also used to work for George Soros, who personally donated $170 million to Democratic candidates and campaigns during the 2022 midterms. But he has now turned into yet another mouthpiece for the administration, spouting lies about the economy to justify the president's actions, though he does so with great difficulty, said Ruhle. 'But isn't it also hard for Scott Bessent to go on television because it's really about an audience of one, right?' asked Coles. 'He's sort of scrambling to obey his boss.' 'It's extremely difficult for him,' replied Ruhle, drawing a contrast with Trump's Secretary of Commerce, Howard Lutnick. The latter official is, she said, always 'happy to put on the show and the performance because that's what he's always done,' she added. Ruhle said that Lutnick is the 'middle guy' who will 'sell whatever Donald Trump wants him to sell that day to win the trade, to get the commission,' whereas Bessent, who has a stronger grasp on the economy, knows when the administration is 'manufacturing lies.' 'Scott, in some ways, you know, is backed into a corner and he's frustrated because how does he defend Trump's position, or where does he go from here?' she said. New episodes of The Daily Beast Podcast are released every Tuesday, Thursday and Sunday. Follow our new feed on your favorite podcast platform at and subscribe on YouTube to watch full episodes.
