The selling of the 10-year Treasury Note (and the corresponding rise in yield) since December 31 is still just a blip, but is it a blip of things to come?
The 10-year’s yield closed yesterday’s session at roughly 2.5%. Yes, that’s still historically low, although it’s up from the 2.04% low touched last month. Noise, perhaps, although some of the noise of late sends a suspicious mind wandering.
That includes the echoes reverberating from this morning’s advisory in the New York Times: “China Losing Taste for Debt From U.S.” In the current climate, when the U.S. government is pulling out all the stops to spend money, and sell Treasuries to fund the plan, it’s hard to ignore a headline casting doubt on America’s single biggest source of lending these days.
“All the key drivers of China’s Treasury purchases are disappearing — there’s a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates,” Ben Simpfendorfer, a Hong Kong-based economist at the Royal Bank of Scotland, tells the Times.
Complicates is a somewhat ambiguous reference, although we all know what he means. Rates may be inclined to go higher at some point. Perhaps not yet, perhaps not for a long time. But in the long run, it’s hard to see how the boys in Washington can engineer another outcome. True, that and 50 cents will get you a cup of coffee when it comes to searching for profitable trades for next Tuesday. But if you’re inclined to gaze a bit further into the future, there’s quite a bit of meat on this bone.
Then there’s the story’s reference to a senior central bank official in China, who reportedly said late last year that the Middle Kingdom’s foreign exchange reserves kitty has been doing the unthinkable lately: dwindling. It’s no great surprise to learn that the great wall of exports flowing from China is slowing, given the current economic climate in the global economy. But if this is a trend with legs, there’s going to be trouble ahead in bond land, perhaps more than the casual observer of the financial scene recognizes.
But, wait—there’s more. Much more. Debt, that is. The Congressional Budget Office projects that the federal deficit will reach an unprecedented $1.2 trillion, or 8.3% of GDP, as the chart below shows. In testimony yesterday to Congress, acting CBO director Robert Sunshine delivered a message in direct conflict with the imagery that his surname conjures: “The major slowdown in economic activity and the policy responses to the turmoil in the housing and financial markets have significantly affected the federal budget,” he advised. “As a share of the economy, the deficit for this year is anticipated to be the largest recorded since World War II.”
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Is it any wonder that holders of government debt, here and abroad, might be feeling a bit skittish? As we wrote on Tuesday, the mounting debt load, current and future, on the U.S. government is old news, but it has legs. For the moment, those legs keep getting longer and stronger. Before this is all over, this story may be on running on stilts.