The economy is on fire, cost pressures ostensibly rising, federal government borrowing is skyrocketing, and yet Treasuries are not interested. The 10-year yield is now 16 basis points below its 2021 high (March 31st).
If the markets were worried about debt sustainability, the 30-10 year segment of the curve would have been expected to steepen. Instead, the 30-year yield has dropped more, by 20 basis points since its 2021 high (18th/19th March).
That path is fraught with risks. Too often in the past, big marginal tax increases have triggered ‘behavioural changes’ that lead to a shortfall in receipts: and then, the markets take fright, reducing the scope for higher revenues (in this case, a stock market correction would become self-fulfilling: lower stock market valuations would reduce capital gain receipts further, potentially putting pressure on Treasury yields, sending stocks down again, further damaging the tax yield. It is too easy for left-leaning politicians to assume there is unlimited funding available for spending on social objectives).
Summary
• Treasuries looking beyond inflation hump
• Bullish for real estate
• But fiscal deficit rings alarm bells
