ReFundMe
Knock on wood I suppose, but the US bond market's reaction to Treasury's closely-watched refunding announcement looked pretty tame, all things considered.
By "all things considered," I'm referring not only to the fact that the borrower was downgraded 15 hours prior to the unveil, but also to generalized investor concerns around supply at a time when interest costs are rising and the Fed is still letting its balance sheet roll off.
Fitch cited projections for the US government's debt servicing
Something I’ve come to appreciate recently is the large increase in interest payments over the last year. I know there are a bunch financial tightening processes going on, but for people with savings, there is a pretty big raise. I know this not spread to the people most likely to spend it, but it is money injected into the economy and a lot of it would seem.
Whether the Federal debt is or is not really “debt” is not, I think, the end of the story.
Everyone – government, politicians, investors – treats it as debt. That means when old “debt” matures and revenues undershoot spending, new “debt” has to be issued and sold at the yield that investors demand.
If it wasn’t treated as debt, the Treasury wouldn’t have an account at the Fed that runs low and needs replenishing; Treasury would simply be the Fed and type extra trillions into its TGA as needed without all the tiresome auctioning.
Sure, until Rome falls there will be demand for Treasuries. Demand will grow, more or less, depending on the growth of the global economy, wealth, trade, investment, etc. Supply (issuance) also grows, more or less, depending on tax revenues, spending, maturities, etc.
The shock absorber between demand growth and supply growth is yield. Yield drives duration asset valuations. Stocks and bonds are duration assets.
So it seems to me that investors do have a reason to prefer lower deficits and restraints on issuance (within reason).
You’re missing the Fed, the money printer, as a major purchaser. Thanks to them we had extremely low interest rates even though the debt trajectory was similar to today’s.
If for some reason interest rates get too high because debt buyers are scared of deficits, the Fed would step in to control rates.
This is the point H keeps making: when it comes to the US, the concept of national debt should really be seen as measure of money in circulation and not something the US inhabitants will need to repay via tax increases. It’s only a problem when the money printed is not used to grow the economy/productivity.
I lost whatever rubber stamp faith I had in credit agencies (Fitch too!) after the Great Financial Crisis. I’d dare wonder what private conversations occurred in Fitch that made them “this time” feel like the US has financial instability since it’s all relative: Russia, China, or even the UK don’t seem AAA places to me?
Pretty easy money to finally get 5% from the US govt, how many other bond issuers (or even VCs themselves) are now in a bind to outperform?
Or more accurately what money influenced their credit rating decision since that is essentially their business model. Payment for ratings.