Wednesday's Market Minute: Here's How To Know If Treasury Refunding Matters

Worrying about the American debt load is like worrying about the sun burning out – that’s what I wrote last month in this column. Our sun will indeed burn out, in somewhere between 5 and 10 billion years. Not only is that known, it’s part of the deal we make for getting to enjoy its benefits. It’s nothing to fear, unless either A) you live in year 9.999 billion, or B) the rate at which the sun is losing energy accelerates.

America is the sun of our economic solar system. On an infinite time horizon, we too will lose that key centrality. 

First let's establish that we are, in fact, not living in year 9.999 billion. The evidence is straightforward and fairly incontrovertible: every competing currency has depreciated against the U.S. Dollar over the last 10 years, and the greenback accounts for nearly 90% of global transactions, near the highest portion in 30 years. Every dollar we print is a flame of life-giving monetary energy that powers mankind. Our sun is strong, in fact, stronger than just about anyone thought possible after emitting so much explosive, stimulative plasma to keep us all warm and busy throughout Covid’s Long Winter.

To some extent that also addresses point (B): how would we know if America’s financing methods were accelerating its demise? The fact we pushed debt/GDP ratios to record levels during Covid, got extremely high inflation after, but the market still trusts our currency the most, and our economy actually took a leap forward relative to all others, speaks for itself.

But let’s still explore the hypothetical: how would we know if the market changes its mind?

Many say to simply watch Treasury yields. This is almost certainly wrong. There has been no discernible correlation between higher deficits or debt ratios and bond yields. There were a few isolated moments lately in which bond auctions spurred volatility, but the rise in yields has been much more correlated to interest rates and the degree to which the economy beats expectations. Plus, the dollar has been rising in tandem. That’s essentially the market giving the U.S. price-insensitive clearance to print its way out of debt. Others have sounded the alarm over a rising “term premium” in Treasuries – the amount of yield that reflects a sort of theoretical credit risk. Yes, it’s rising, but barely showing up again, for the first time in years, and still trending down over a multi-decade horizon.

If supply-side events like today’s Treasury funding announcement cause the dollar to drop while yields rise, that might be a different situation worth paying attention to – particularly if U.S. stocks fall concurrently. That is what I imagine the “accelerating burnout” scenario may look like, but we are likely nowhere near it yet, nor ever will be in our lifetime, or your children’s, or theirs… or theirs… or theirs…

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