US Treasury's Trillion-Dollar Problem: Could Rising Yields, Bond Flood Signal Stock Market Storm?

The U.S. Treasury’s interest expenditures are approaching a whopping $1 trillion, equating to a hefty 4% of the nation’s economy and even surpassing Tesla‘s entire market valuation.

These findings are based on the most recent Bureau of Economic Analysis data, which shed light on the considerable financial strain the United States government is bearing as a result of interest payments on the national debt.

The surge in interest expenses, which has almost doubled since January 2020, has been fueled by a combination of factors, including the Federal Reserve rate hikes driving up yields on government debt and a widening budget deficit.

“Deficits have trended above our economists’ expectations throughout the fiscal year due to higher spending and lower than realized revenues,” Bank of America’s rates analyst Mark Cabana CFA recently stated in a note.

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Chart: U.S. Interest Rate Bill Approaches $1 Trillion

A Tsunami Of Treasuries Is Flooding The Market

To finance the rising deficit, the U.S. Treasury is expected to issue a deluge of government bonds into the market.

Market experts predict a substantial increase in the supply of treasuries in the coming weeks, as Bloomberg recently reported. The Treasury will increase its so-called quarterly refunding of longer-term Treasuries from $96 billion to $102 billion for the first time since early 2021. 

Treasury auction sizes are headed higher at the August refunding window and this will be the first of
several quarterly increases to the U.S. Treasury’s coupon calendar, Bank of America warned.

Higher Finance Needs May Generate Market Pressure

The Treasury now faces the daunting challenge of managing higher financing needs, both in the current fiscal year and beyond, according to Bank of America’s estimates. Moreover, it must navigate the intricacies of a longer Fed balance sheet runoff, commonly known as quantitative tightening.

Taking into account the year-to-date deficit and incorporating projections for Q3, analysts at Bank of America estimate the Treasury’s financing needs to reach an astounding $1.8 trillion in FY ’23.

Analysts are concerned that increased U.S. Treasury auction sizes could create a difficult supply-demand scenario, affecting market functioning and liquidity, particularly during periods of economic or geopolitical shock.

Analyst, Mark Cabana, warned of a potential deterioration in market conditions, creating concerns about the market’s stability.

30-Year Yields On A Rising Wedge Pattern

This recent spike marks the highest rate observed since November 2022, and what’s more, it currently stands 1% above the inflation rate, making it the most elevated “real rate” since June 2020.

The yield on longer-dated 30-year U.S. Treasury bonds has staged a remarkable resurgence, surging to 4%, a level it hit twice in the month of July.

As bond yields climb, the value of these securities takes a hit, leading to a decline in their prices. The Ishares 20+ Year Treasury Bond ETF TLT continues to grapple with the impact of rising bond yields, recording fresh lows in 2023. It remains down 15% from its level a year ago, and is 6% lower from six months ago.

Chart: U.S. 30-Year Treasury Yields Top 4% In An Upward Bias

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