- The U.S. can’t afford higher interest rates…
- Get ready for more QE…
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Dear reader,
Like thick gray clouds forming over a parade route… the bond market is indicating that onlookers are in for a hard soaking.
Long-dated United States Treasurys are shedding value. Thus yields on the same long-dated United States Treasurys are on the jump.
Recall bond dynamics: Bond yields and bond prices exist in a state of antagonistic polarity.
If bond prices increase, bond yields decrease. If bond prices decrease, bond yields increase.
Imagine a seesaw in swinging dynamism. Now you understand the price/yield relation.
Now consider the bellwether 10-year Treasury note.
Surging Yields
3.96% on Feb. 27 — one day prior to Operation Epic Fury — the 10-year Treasury yield presently comes in at 4.57%.
A leap from 3.96% to 4.57% may not alert or alarm you.
Yet the 10-year Treasury note generally advances or retreats not in miles, yards, feet or inches.
It is an instrument that generally advances or retreats in centimeters and millimeters.
A glacier is an airplane next to it. And so such a fantastic leap in under three months attracts substantial notice — negative notice.
It has certainly attracted the concerned notice of market commentator Doug Casey. From whom:
- A rising 10-year Treasury yield signals trouble for the US dollar because it means investors are selling Treasuries, which pushes up the US government’s borrowing costs. That is why the 10-year Treasury yield is a major pain point for the US government.
- The 10-year Treasury yield was 3.97% when the war started. Now it is around 4.60%, an increase of roughly 63 basis points…
- At today’s debt levels, every 1 basis point increase in the government’s average borrowing cost adds roughly $3.9 billion in annual interest expense. So a 63 bps rise is not trivial — it translates to nearly $250 billion in additional yearly interest costs, materially widening a 2025 budget deficit that was already around $1.8 trillion.
The U.S. Runs up Against Ferguson’s Law
Thus the iron chains of debt hang increasingly heavy upon Uncle Samuel’s already drooping shoulders:
- Higher yields mean the US government must pay tens or even hundreds of billions more in interest on its debt…
- The problem is that interest on the federal debt is already over $1.2 trillion and is now the second-largest item in the budget. The US government cannot afford yields going much higher because the interest expense would push it toward bankruptcy.
I have previously cited Ferguson’s Law, so-called, in these pages. Historian Niall Ferguson has ransacked the historical record.
His researches reveal that any great power that consecrates more resources to debt service than to defense is headed for the shoals.
The Hapsburg Empire, the Ottoman Empire, the British Empire and the prerevolutionary French Empire all ended upon the perilous shallows of excessive debt.
And the United States?
Last year the United States devoted more money to debt service than defense — as it will this year — and likely each successive year through 2050.
And so it is navigating the identical waters as previous great powers… heading for the identical hazards.
Get Ready for More QE
Concludes Mr. Casey:
- I am not sure how — or even if — the US government can manage this situation. Something has to give, and we will not have to wait long to find out what.
Yet I am sure how the United States government will manage this situation — or attempt to manage this situation.
Through its central bank, it will reach into the identical trick bag into which it reached following the Great Financial Crisis.
Within that trick bag was — and is — the gimmick of quantitative easing.
The Federal Reserve will purchase substantial quantities of 10-year Treasury notes.
Under the rigid law of supply and demand, the Federal Reserve’s vast purchasing will elevate the 10-year Treasury price.
Thus the 10-year Treasury’s yield will decrease — recall the seesaw dynamic between bond prices and bond yields.
And so the chicanery of central banking may work the trick… and reduce the 10-year Treasury yield.
Russian Roulette
“We’ve done it before,” the monetary authorities will argue, “and we can do it again.”
They will certainly attempt it. And perhaps it would “work.”
Yet at what price?
Reduced interest rates encourage the taking on of additional debt.
Thus the United States government will plunge even deeper into debt… which will require future quantitative easing to decrease interest rates… in endless succession… until the end of the chapter.
The business cannot sustain indefinitely, of course. And that which cannot continue indefinitely will not continue indefinitely.
It is at bottom a game of Russian roulette. Even the best of luck eventually runs dry.
Even Uncle Samuel’s.
Regards,
Brian Maher
for Freedom Financial News
