No. of Recommendations: 11
https://www.marketwatch.com/story/treasury-yields-...President Trump says that canceling the tariffs would make the US, financially, a third-world country. I guess in a world where the tariffs took the place of the taxes which would have been raised if Congress had not extended the tax cuts, there’s a huge negative cash flow and the deficit will go up quickly.
Surging long-term government bond yields are causing consternation across financial markets on Tuesday. A trifecta of separate themes are converging to focus investors on the rising cost of government debt amid unsustainable budget deficits.
Last week the crisis was the sell-off in French bonds (TMBMKFR-10Y, 3.596%) – called OATS – after a confidence vote on the government was called for Sept. 8, prompting a sharp fall in the CAC 40 share index on fears of a political vacuum. The spillover from this volatility has triggered similar declines in German and Dutch government bonds, now also trading with yields at fourteen-year highs.
This week, the alarm bells are ringing in the U.K. as 30-year bonds – known as gilts – continue their inexorable decline as the Labour government tries to plug a £20 billion to 25 billion fiscal hole during its upcoming autumn budget.
Meanwhile, U.S. 30-year yields have moved back up toward 5% as courts declare trade tariffs illegal, calling into question the hundreds of billions of dollars of revenue generated since their imposition in April.
Deutsche Bank’s head of macro and thematic research, Jim Reid summarized the predicament in which the U.K. government finds itself as a “slow-moving vicious circle: rising debt concerns push yields higher, worsening debt dynamics, which in turn push yields higher again.”
Thirty-year gilt yields reached 5.68% in Tuesday trading, the highest since 1998, and the lack of confidence in the government’s ability to stabilize its finances is reflected by a 1% slump in sterling against the dollar overnight.
Panmure Liberum’s head of research Simon French pointed out that ”long-end yields are rising around the world amidst a structural shift in demand” but nevertheless “the U.K. is experiencing asymmetric inflation right now that means investors are demanding high compensation to hold U.K. debt.”
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A couple of interesting points:
A rise in the US dollar is generally a negative, from a fundamentals standpoint, to the price of US stocks.
I will leave it to Wendy to discuss whether the increase in inflation caused by aa fight to have the Fed reduce short-term interest rates is sufficient to counter the stress on longer-term TIPs.
In a world where politicians would consider it political suicide to undo the recently renewed tax cuts and tariff revenue was nixed by the Supreme Court, there is a consideration of the chaos which would ensure if the Trump administration started to re-implement tariffs based on other legal theories. This would likely cause years of on again/off again financial situations. In the meantime, I suspect there will be a slowing of trade agreements with the US as our partners wait to see if, in fact, the tariffs are legal.
China has shown the world that it can force the US into submission by withholding the export of rare earth magnets required by our industry and military. While the US imposed a substantial incremental tariff on India for buying Russian oil, it seems to have forgotten that China does as well.
Historically, on a statistical basis, September is the worse month of the year for the US equity market.
Jeff
