Latest news with #U.S.Treasurys
The Hill
3 days ago
- Business
- The Hill
A bond market meltdown might be inevitable
The recent surge in yields on long-dated U.S. Treasurys has generated concern in some circles. Jamie Dimon, the CEO of JPMorgan Chase, recently warned that the bond market is likely to crack as a result of spiraling government debt levels. 'I just don't know if it's going to be a crisis in six months or six years, and I'm hoping that we change both the trajectory of the debt and the ability of market makers to make markets,' he said. Others remain more sanguine and observe that interest rates have in fact normalized close to their pre-2008 global financial crisis levels. In the aftermath of the financial crisis, both real and nominal rates were stuck at unusually low levels for about a dozen years. But, since 2022, we have seen both policy and market rates edge toward their pre-crisis levels. With interest rates reverting back to their historical norms, is the current wariness surrounding the long end of the yield curve among key investors warranted? To evaluate the validity of such fears, it is worth reviewing recent U.S. fiscal history. During the past 45 years, the U.S. has had to deal periodically with the 'twin deficits' problem — the near-synchronous widening of the fiscal deficit and the current account deficit. In the past, bipartisan policy compromises pushed through by enlightened political leadership have helped America avoid a debt/currency crisis. In the early 1980s, the Reagan-era tax cuts contributed to a decline in U.S. government revenue that was not offset by cuts on the spending side and this led to a widening of the budget deficit. Meanwhile, the high interest rates associated with the Paul Volcker disinflation episode led to a sharp appreciation of the U.S. dollar and contributed to a deterioration of the trade and current account balances. This simultaneous deterioration of budget and current account balances gave rise to the twin-deficit hypothesis and highlighted the potential interconnectedness between fiscal deficits and trade deficits. Emergence of 'twin deficits' during the early 1980s generated significant concern in policymaking circles and led to concrete measures on both the fiscal front (in the form of the Tax Reform Act of 1986 and the Budget Enforcement Act of 1990) and on the exchange rate stabilization front (in the form of multilateral agreements such as the 1985 Plaza Accord and the 1987 Louvre Accord). In the Clinton era, further steps (such as the 1993 Omnibus Budget Reconciliation Act, the reduction in military spending associated with the post-Cold War peace dividend and the 1996 Personal Responsibility and Work Opportunity Reconciliation Act) were undertaken to improve the U.S. fiscal outlook. During the fiscal 1998 through fiscal 2001 period, the federal government even ran budget surpluses. Concerns regarding the 'twin deficits' reemerged during the George W. Bush era as fiscal and current account imbalances worsened. Prior to the 2008 global financial crisis, economists worried that the spike in budget and trade deficits was serious enough to threaten a dollar crisis. Following the collapse of Lehman Brothers in September 2008, however, there was a dollar shortage abroad and the U.S. currency actually strengthened. Furthermore, as household consumption collapsed and personal saving rate rose, the U.S. current account markedly improved in the post- global financial crisis era. During the Obama era, the 2011 Budget Control Act and the artificially suppressed borrowing costs (via Fed's quantitative easing and near-zero interest rate policies) helped ease the fiscal burden. Over the past five years, both the budget and trade deficits have deteriorated sharply. Budget deficits have exceeded 5 percent of GDP since 2020 and projections indicate deficits will remain elevated, raising concerns about fiscal sustainability. Critically, government borrowing costs have risen sharply since 2022. Historian Niall Ferguson has suggested that America's superpower status may be threatened as the U.S. government now spends more on interest payments than on defense. Unlike prior episodes, the current cycle of deteriorating external and fiscal imbalances is significantly more worrisome as the country appears to be beset by institutional decay and political ineptitude. Domestic and foreign investors in U.S. Treasurys are starting to fret about the absence of fiscal rectitude even as government debt-to-GDP ratios reach levels last observed in 1946. Additionally, illogical and inconsistent policies on the trade and foreign policy front raise the prospect of a so-called 'moron premium' being applied to U.S. assets. Legislative threats to tax foreign capital is raising alarm and will likely push up the cost of borrowing even further. Such actions are also fueling concerns about the pre-eminent reserve currency status of the U.S. dollar. Any diminishment of dollar's exorbitant privilege will affect U.S. fiscal sustainability. Unlike the 1990s, there is currently no political consensus on reining in fiscal profligacy and restoring fiscal sanity. Harvard's Ken Rogoff recently noted: 'To be sure, this isn't just about Trump. Interest rates were already rising sharply during Biden's term. Had Democrats won the presidency and both houses of Congress in 2024, America's fiscal outlook would probably have been just as bleak. Until a crisis hits, there is little political will to act, and any leader who attempts to pursue fiscal consolidation runs the risk of being voted out of office.' The late great MIT economist Rudiger Dornbusch once quipped: 'In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.' Recent spikes in bond market volatility and long-dated Treasury yields suggest that the moment of fiscal reckoning may finally be approaching. Vivekanand Jayakumar, Ph.D., is an associate professor of economics at the University of Tampa.
Yahoo
5 days ago
- Business
- Yahoo
Bitcoin Liquidity Crunch Points to Fresh Volatility as New Cycle Builds: Sygnum Bank
Bitcoin's BTC circulating supply is thinning out with an estimated 30% drop in liquid BTC over the last 18 months, a steep drain that could set the stage for potential upside volatility in the coming months, a Sygnum Bank's market outlook said Tuesday. 'Bitcoin's liquid supply is getting severely constrained while positive demand trends continue, creating the foundation for upside shocks in the price,' analysts wrote, adding the rise of ETF inflows, along with governments increasingly open to bitcoin reserves, is fueling speculation about a 'demand shock' scenario, where too many buyers chase too few coins. Over a million BTC has been withdrawn from exchanges since late 2023, Sygnum said, with ETFs and corporate treasuries driving the hoarding. That's putting added pressure on traders who need liquidity to exit during spikes or to cover shorts. Meanwhile, Bitcoin's role as a safe haven is getting a fresh boost from turmoil in U.S. Treasurys and a weakening dollar. Sygnum flagged that falling U.S. Treasury prices and ballooning federal debt are pushing investors back toward gold and bitcoin. The crypto's resilience in the face of these fiscal headwinds suggests it's becoming a go-to hedge. The report also highlighted new demand catalysts emerging on the geopolitical front, such as three U.S. states have now passed Bitcoin reserve bills, with New Hampshire already signed one into law, while Texas appears next in line. Overseas, Pakistan and even a U.K. party front-runner are weighing official BTC reserve allocations. These moves, while symbolic for now, could eventually add a major bid to the market if they materialize. The bottom line is that the ongoing crypto cycle looks far from over. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
CNBC
30-05-2025
- Business
- CNBC
How can investors avoid the impact of Section 899?
Beat Wittmann, chairman of Switzerland-based Porta Advisors, noted that investors have preferred German government bonds over U.S. Treasurys during market turbulence in recent weeks. He adds that cash could also be a suitable alternative for investors trying to shield themselves from the impact of Section 899 of the "One Big Beautiful Bill" Act, if it became law.
Yahoo
26-05-2025
- Business
- Yahoo
Republicans' big bill scared bond markets. That's bad news for your wallet.
The market for U.S. debt, aka the bond market, is a huge and critical part of global finance, but one that usually percolates in the background. Yet lately it's been in the headlines. What's behind this disturbance in the force? You don't need to be an expert in finance to answer that question, and it's important that you understand the answer, because it will have a direct impact on your economic life. Perhaps not surprisingly, politics are at the root of these recent developments: the recklessness of both the Trump administration's economic agenda and congressional Republicans' deficit-exploding legislation are playing out in real time in ways you need to know about. Starting at the beginning: As we all know, the U.S. government consistently spends more than it collects in taxes. This difference between government receipts and outlays is the deficit, which in 2024 was $1.8 trillion, or 6.4% of America's gross domestic product. Where does the Treasury get this money? It borrows it in the bond market, meaning it sells IOUs to creditors who lend money to U.S. government. They don't do this because they're patriots who want to make sure the government can meet its obligations. They do it for a) the yield on the loan, i.e., the interest rate that the bond pays out, and b) the safety of investing in U.S. Treasurys. Such investments have historically been the least risky investments you could make. The U.S. government has always been safely counted on to pay its debts. Default risk has been zero. OK, so why the anxious headlines, like 'The Bond Market Is Waking Up to the Fiscal Mess in Washington' in The Wall Street Journal and 'Bond Market Shudders as Tax Bill Deepens Deficit Worries' in The New York Times? Why are economists, myself included, who formerly told debt scolds to stop obsessing over the debt now urging the opposite? 'In a short amount of time,' economist Larry Summers recently told The Atlantic, 'the fiscal picture has gone from comfortably in the green-light region to the red-light region.' As the headlines suggest, a key trigger for this angst is the legislation that passed the House this week. Global investors in U.S. debt are learning how many trillions the GOP's bill is likely to pile on to the already swollen deficit (since it's a work in progress, we don't know the number yet, but my analysis suggests something in the $5 trillion range). The Wall Street Journal's chief economics commentator Greg Ip noted that the deficit implications of this budget 'would be higher than any other sustained stretch in U.S. history, and more than almost any other advanced economy. … Before 2023, [U.S. deficits] accounted for half of advanced economies' deficits, according to the International Monetary Fund. From 2023 through 2030, it will be two-thirds.' The result is an increase in the interest rate that the U.S. government has to pay its lenders. Think of it this way. You've got $1,000 to lend to one of your friends, both of whom are asking for the loan. Your pal Norm has a good job, a stable family, and wants to invest in a course that will set him up to get that regional VP gig he's been angling for. Your other pal, Shady, just got fired from another job, but promises that he's going to take your $1,000 to Vegas and pay you back double. Assuming you're a rational lender, you're going to charge Norm a much lower interest rate than Shady. Bond investors are making a similar call. They're starting to worry about the sustainability of our debt, which, at $29 trillion, is closing in on 100% of U.S. GDP. That's a big number, to be sure, but it's not automatically worrisome. After all, even with the onslaught of Trumpian chaos, we still have one of the world's strongest, most productive economies, the dollar is still the world's dominant currency, and default risk on our sovereign debt remains just about zero. Understanding why bond investors are right to be worried, then, requires one step deeper into the weeds. Whether we're talking about your family or the government, there are two key factors that determine debt sustainability: the interest rate and the growth rate. If Norm borrows at 3% and gets that VP promotion, which boosts his earnings by 4%, he's golden. He can service his debt with the income from his investment. Whereas if Shady borrows at 3% and loses everything in Vegas, he's up a creek without a paddle — and so, as his lender, are you. Mapping that onto the U.S. case, investors are worried that the Trump administration and the Republican Congress are engaged in set of actions that will both lower growth and raise interest rates, a toxic combination. The GOP bill doesn't just add unprecedented trillions to the debt; it takes health coverage and nutritional support from poor people to very partially offset big tax cuts for the wealthy. There's nothing in there that would lead an objective person to think there's anything pro-growth about it. Add the tariffs are expected to slow growth this year, perhaps from around 2% to around 1%, according to forecasts by Goldman Sachs. This combination of ever-increasing debt (which, to be fair, predated Trump; he's just making it a lot worse), slower growth and the pervasive sense that neither the administration nor the congressional majority even know or care about these risks, is leading lenders to the U.S. government to insist on a higher return for buying those IOUs known as Treasury bonds. The rate on a 30-year Treasury has climbed from about 4% last September to about 5% on Friday. That's just 1 percentage point, but when you're servicing about $30 trillion in debt, one more point on the interest rate translates into $300 billion more in debt service. Even in Washington, that's real money. To make matters worse for all of us, the interest rates on U.S. Treasurys are benchmarks for other key rates throughout the economy, including those on credit cards, auto and mortgage loans. Mortgage rates climbed above 7% last week, and their momentum is solidly in the wrong direction. To be clear, it's very hard to predict where interest rates are going, but as long as Trump's policy continue to put downward pressure on growth and upward pressure on rates, I'm hard-pressed to see rates going anywhere but up. Actions have consequences, and financial markets don't subscribe to the administration's alternate reality where everything's fine and under control. In fact, the bond market is loudly saying everything is far from fine — and the folks under control are out of control. This article was originally published on
Yahoo
20-05-2025
- Business
- Yahoo
Stock futures, dollar fall after Moody's strips U.S. of its top credit rating
Just when the stock market had clawed back all the losses sparked by the panic over President Donald Trump's tariff plans, investors faced a round of debt-related angst as markets slid Sunday after Moody's Ratings stripped the U.S. government of its last triple-A credit rating. U.S. stock-index futures fell, while U.S. Treasurys also saw pressure, pushing up yields. The U.S. dollar weakened and gold futures rallied, but the overall reaction was relatively contained, analysts and traders said. My father's widow keeps sending me $200 checks in the mail. Why would she do this? 'I'm an idiot': I'm middle aged, earn $68,000 a year and have $39,000 in credit-card debt My ex-wife said she should have been compensated for working part time during our marriage. Do I owe her? Recession indicators are out of control. When will this madness end? My husband will inherit $180K. I think we should invest the money. He wants to pay off his $168K mortgage. Who's right? 'S&P 500 futures found dip support well above 5,900, showing that this isn't an outright panic. Bears had their shot, but bulls are still defending key levels,' said Stephen Innes, managing partner at SPI Asset Management, in a note. Dow Jones Industrial Average futures YM00 fell around 230 points, or 0.5%, by Sunday evening. S&P 500 futures ES00 dropped 0.7% to trade near 5,931, while Nasdaq-100 futures NQ00 sank 1%. The ICE U.S. Dollar Index DXY, a gauge of the dollar's value relative to major rivals like the euro, was down 0.3%. The yield on the 10-year note BX:TMUBMUSD10Y was up 3.5 basis points to 4.48%. Yields and debt prices move opposite each other. Gold futures GC00 were up 1.4% at $3,230 an ounce. Strategists had warned stocks might be vulnerable to profit-taking after a sharp bounce that erased steep losses that had sent the S&P 500 SPX to the brink of a bear market last month following the April 2 rollout of Trump's tariff plans. Stocks rebounded sharply as the administration backtracked on the most severe measures, with the S&P 500 and Dow Jones Industrial Average DJIA last week turning positive for the year to date. The S&P 500 rose 5.3% last week, its biggest weekly gain since April 2020. 'In light of the extended and narrow nature of the advance, this may be the catalyst that sparks a pullback or consolidation,' said Cam Hui, who runs the Humble Student of the Markets blog. 'It remains to be seen how bearishly the market interprets the downgrade. Stay tuned.' Moody's on Friday said it had cut the U.S. rating by one notch, to Aa1 from Aaa, and that the move 'reflects the increase over more than a decade in government debt and interest payment ratios to levels that are significantly higher than similarly rated sovereigns.' Check out: The U.S. just lost its last pristine credit rating. What that means for markets. Moody's MCO was the last of the major credit-rating firms to strip the U.S. of a triple-A rating. In August 2011, S&P Global Ratings SPGI was the first to take away a triple-A rating from the U.S. amid a debt-limit showdown — something that has since become a frequent occurrence in Washington. The move set off political shockwaves, coming amid a late-summer stock-market selloff tied to the fiscal showdown and a worsening eurozone debt crisis. Treasurys, however, rallied after the S&P downgrade, pulling down yields due to worries over growth. Fitch Ratings was next in August 2023, with the move coming shortly after the resolution of another debt-limit battle. The Moody's decision came the same day the House Budget Committee failed to advance a sweeping tax and spending bill that is the centerpiece of President Donald Trump's legislative agenda, underscoring deep divisions within the Republican caucus. Treasury Secretary Scott Bessent, in a Sunday interview with NBC's 'Meet the Press,' waved away the downgrade. 'I think Moody's is a lagging indicator,' he said. 'I think that's what everyone thinks of credit agencies.' While investors have long considered the likelihood that Moody's would join S&P and Fitch in downgrading the U.S., the Friday move appeared to catch investors by surprise, said Michael Kramer, founder of Mott Capital, in a note. The reaction in the Treasury market will be crucial, he said. 'Most are dismissing the news as not a big deal, and perhaps it's not. After all, the U.S. has already had two prior downgrades,' he wrote. Still, the timing is sensitive given current negotiations around the Republican-backed tax bill, he said. 'The key issue is that this downgrade comes at a moment when term premiums were already rising, potentially adding even more upward pressure.' The yield on the 10-year Treasury note rose 6.3 basis points last week to to 4.437%. Yields and debt prices move opposite each other. Treasurys are likely to see a further rise in term premium, said Innes at SPI Asset Management, but the reaction is 'more psychological than mechanical,' he said, with key players, such as foreign institutional buyers, having shunned Treasurys for months. 'They saw this coming,' he wrote. 'The downgrade just gives it a headline.' Bond yields jump after Moody's downgrade of U.S. credit. Why it matters for consumers — and Congress. I'm 57 and ready to retire next year on $7,500 a month, but my wife says no. Who's right? My wife and I paid off my stepdaughter's $415K mortgage in exchange for her house, but it's now worth $310K. Should we sue? My second wife says her 2 kids should inherit our estate, but I also have 2 kids. Is that fair? 'I am scared to death that I'll run out of money': My wife and I are in our 50s and have $4.4 million. Can we retire early? 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