Wow what a selloff in equity markets!! The market opened lower, but right after the results of the 20 year treasury auction equities took a sharp tumble—about 4% from the peak to the bottom—ouch.
The 10 year treasury yield also shot higher–now up 10 basis points to be trading at 4.58%. Although I had written, many times last year, that I expected rates to head higher this year based on supply concerns I was truly hoping that I was wrong (which I normally am). This is getting serious. The one hope I had mentioned for moving rates lower was the perception that congress would tackle the debt issues–now it doesn’t appear that they will do anything, but spend, spend, spend.
Of course we are seeing red right now in income issues–no giant surprise as rates move up and up.
I am pondering my next investing moves–I wish I could see a way out of this mess, but if congress doesn’t find a way to cut spending the outlook is pretty bad.
TIPs real yields at 2.80 as I type, overnight market.
It’s been my experience that if dealers take a lot of auction paper we get a treasury rally the next few days. They know where the buyers are.
I am not sure on the % dealers took but above it says more than average.
In any case the House deal is dead-on-arrival at Senate
Gold
No offense dan, but I think its a little late to jump into gold. I think we are seeing a lot of panic buying that may not hold.
Its up about half in the past year but seems to be leveling out. Although it might go higher, looks to me like the risk of loss is too high (just my thought – do your own analysis).
Agree wouldn’t chase the move here either… but would rather be holding it than a bunch of 30 year paper @ 5%.
Funny, Dan. Gold has long strong periods and weak periods. If you can identify the turns, gold is terrific. Otherwise, over the long run, it performs about like bonds, IIRC. I don’t think this gold bull is over, but it might be due for a pause. BWDIK?
I have been selling bonds adding cash and buying Gold..Barely have 10% in gold need to add on pull backs..Truly scary times….
Neither the President or Congress seem interested in reining in the budget or holding down long rates. Both policies were foundational to policy in January. Financial markets appear to have gotten the message.
Can I veer into politics if I express contempt for the entire system in DC?
Doesn’t seem to matter what I vote for, directionally spending will only ever increase. Debatable if voting even impedes the rate.
JP,
In the same way that an individual’s ability to carry more debt increases as it ages (note my homage to trans), the government’s ability to service increases with growth in the economy. It’s dangerous to RELY ( or RILY on it for sure) on this, especially with a decreasing population in the future. That’s why I only carry debt for direct arbitrage trades. Not even a home loan.
OFC , the Fed’s balance sheet being unlimited , it can always buy whatever treasury prints. Heck, maybe what DOGE was doing was setting up for Trump to be able to enforce his BIG BEAUTIFUL BILL if Congress votes against it.
Truly NOT a big beautiful bill….If you liked people living in the streets than maybe this bill is for you…
Congress has an option to increase revenue (tariffs are one way, income taxes are another). It does not just have to be spending cuts.
Annual Budget = Revenue – Expenses
The bond markets will do fine if the Annual Budget is fixed by increasing the revenue number.
So tariff charges are going into the treasury –rather than into higher costs the public will be paying for imports? Hmmm….
The push now is to maintain the tax cut due to go away next year. No change in SALT.
Budget fix at this point = unicorn sighting.
So, that leaves…?
Pain
Gary,
Revenues from tarrifs flow into treasury and are funded by taxpayers through higher product prices. Just an indirect tax.
Truly NOT a big beautiful bill….If you liked people living in the streets than maybe this bill is for you…
Twice saying the same thing is SPAM.
All is good…ha. SALT went thru at $40k too- California & NJ boys especially happy.
But, no budget fix.
Okay, so to net out the deficit, you would need to increase all tax revenue by 50% or cut spending by 33%. What would happen if we increase all taxes (including social security and Medicare) ?Additional info: the deficit is $2T and corporate income taxes are $400B.
To net out the deficit is an excellent goal but we don’t need to do that even. If we “only” ran a deficit of say 3-4 percent of GDP it would do wonders for the Treasury auction. Currently the only strategy on display is to grow GDP faster than spending – I hope that works, but I think that’s been the strategy for a long time and we have WWII level debt to GDP to show for it.
i agree with you. The deficit does not have to go to 0. We need to increase both taxes and cut spending to reduce this deficit. Why people scream that this is poltical is more about them expressing their political convictions that me expressing mine.
We could start by eliminating the earnings cap for the SS tax – which is currently $176,000. This, on its own, would solve half the SS funding issue and give people some confidence the Government has a plan.
Are you going to increase the amount of benefits then they can receive? Or are you just wanting to take wealth from one and try to give it to another?
Tim.. will look for some bargains,,in this sell off . found 1or 2 and still looking. ,Georges
Thanks for the timely summary and for sharing your thinking, Tim!
I completely agree with you that on the fiscal front, things look bad for us income investors.
But I got to wondering. There are two sides to every trade. Is there an asset class, or a set of investors, for which the current situation actually looks good?
Thanks for any thoughts!
People who owe a lot of debt, like my mortgage. it’s value is being inflated away. so, there’s that.
In this tweet from May 18 https://x.com/SecScottBessent/status/1924110227168690298, Bessent had this to say:
“We’ve inherited a 6.7% deficit-to-GDP, the highest outside war or recession.
Our focus is to grow the economy faster than the debt, that’s how we will stabilize debt-to-GDP.”
Maybe that’s possible with organic growth but not growth fueled by increased deficit spending (which is stimulative enough already).
Tim; Just curious have you ever looked at Double Tax Exempt Muni’s in the state that you live??? I only own a few here in Omaha but some now have come down in price and are starting to get a little interesting. I scroll thru Schwabs inventory daily now and there are a few things that look fairly decent if you are willing to buy long term paper.
Chuck,
I have been waiting for > 5% to start buying again. Getting really close to that in my state for some. Keep in mind I exclude hospitals and UNI from my searches.
ChuckP—no I haven’t but may take a look–I’m running out of tricks in my bag to stay safe and yet get a +5% return.
— 20 year auction buyer profile highlights – Fewer direct (domestic) buyers by 3%. More indirect (foreign) buyers by 3%. More dealers by 1.2%. (Comparisons vs 6 month averages. From a forex site.) In short, domestic buyers are showing a lot less interest in buying long Treasuries. Surprise for me — and pardo my ignorance — indirect foreign buyers bought 70.7% of this auction. Somebody maybe didn’t read up on the Mar-A-Lago Accord? JMO. DYODD.
— Random unrelated thought 1. The Marketwatch CD advertising feed was popping up more 4.25% CDs than I have seen in a long time.
— Random unrelated thought 2 – Some pundit on Bloomberg was predicting only one Fed rate cut, a lot less than I was expecting
BearNJ; In regards to your 4.25% CD’s. My Schwab MM account pays me 4.28% & its liquid. I check the rate daily and thats the rate as of today.