Another weak 30-year Treasury bond auction was a timely reminder that the old playbooks may need to be adjusted to the new realities. There was a modest move back ‘into safety’ early in on the week after the catastrophic events last weekend, which continue to unfold. The conflict in the Middle East is escalating rapidly.
There may still be a further rally in Treasuries. But a weak auction yesterday jolted long-dated Treasury yields higher. The inflation reports are not primary anymore. The big concern is the Federal Budget deficit. The deterioration in the deficit this year is more marked than the headline figures suggest. Excluding the effects of the student loan cancellation plan, the budget deficit increased by $1.1tr in FY23 to $2.0tr. This is an unprecedented deterioration in the public finances, when the unemployment rate remains near secular lows.
This has important implications for the Treasury market, even if 2.5% real yields look attractive. For a big drop in real yields from here, there either needs to be a profound shift in fiscal policy or a recession. Neither looks likely to occur imminently, though the jump in oil prices today underlines the risks for energy prices. For now, initial claims continue to trend lower. ‘Other’ recreation services inflation jumped 6.49% y/y in September, a record high (data series goes back to 1999). This was led by a pop in admissions inflation (10.39% y/y). Combined with the strong payrolls number for leisure & hospitality (+96k) last month, recreation services spending remains resilient.
