The markets are never a snapshot of the present. They’re a look ahead. It’s worth keeping in mind as commentators try to make sense of rising Treasury yields.
Take the Washington Post editorial board’s analysis of the recent jump. They write that, “Yields for long-term U.S. Treasury bonds shot up to almost 5.2 percent on Tuesday, reaching their highest levels in almost 19 years. That’s a warning sign about the wobbly state of the economy and yet another reminder of the unsustainability of federal spending.” No, not really.
First, consider their assertion that rising yields are a comment on the “wobbly state of the economy.” If so, it’s more likely that yields would decline as investors seek safety in the most owned income streams in the world.
As for rising yields allegedly signaling “the unsustainability of federal spending,” such a view implies that investors populating the world’s deepest markets suddenly discovered that the U.S. has $39 trillion (and counting) worth of debt in just the past few weeks. Which is not just unlikely, it’s absurd.
$39 trillion was priced long, long ago. And well before the national debt reached $39 trillion.
For those still captivated by Reinhart and Rogoff’s “this time is different” angle, some will say the rising yields are a market reaction to total debt rising past 100% of GDP. See above. Furthermore, it’s just a number as opposed to a rule. Japan is at a 200%+ debt-to-GDP ratio, the U.S. exceeded 100% at the end of WWII, and then Great Britain reached 258% in the 1800s. There’s very little to a number that was priced long ago.
So, what caused the big jump? If anyone knows what drives movements in the world’s deepest markets, they’re not telling. That’s firstly evident by the Post editorial, but it’s also rooted in the truth that anyone privy to such knowledge isn’t advertising it as much as they’re investing it. And making billions off the knowledge.
Speculations? Perhaps opposite the Post commentary, the rise in yields signals a movement away from the relative safety of Treasuries toward riskier equities. This would signal economic optimism, not pessimism.
Another possibility could be that investors see much higher levels of federal borrowing in the future. Except that if the leap in yields is rooted in expected levels of future debt higher than the present, stop and think what that means. Treasuries are in a yield sense back to where they were in 2007.
Lest readers forget, total national debt in 2007 was $9 trillion. Which means that Treasury yields in 2026 are roughly the same as they were in 2007 despite a 333% increase in the national debt.
Which is precisely the point made in The Deficit Delusion. As revenues increase for individuals, businesses and governments, borrowing capacity does. In finance it’s called the “coverage ratio." So far nothing like the previous point has made it into the analysis of more pessimistic experts at locales of opinion including Brookings, Cato, and Hoover. They continue to make basically the same point, that spending cuts and tax revenue increases are the path out of the debt. Neither is a fix. Treasury markets show why.
Treasury yields are yet again the same as they were $30 trillion worth of debt ago. The debt will just grow as U.S. borrowing capacity does due to more tax reveue. Spending cuts will have the same effect.
Neither more tax revenue nor spending cuts address why there’s debt. The only path out of the debt is substantially less taxation that yields substantially less tax revenue.
