The details of the most recent Quarterly Refunding were the catalyst for the slide in Treasury yields. A weaker ADP, and then payrolls, added to the rally. Nevertheless, primary dealers in fact increased their deficit estimates in October, relative to their July forecasts. Dealers generally suggested that risks were asymmetric to the upside.
Treasury yields have likely already peaked, for this calendar year. A few more soft data prints, and the recession narrative will gain traction once again: it will be hard to stand in the way of a further rally in Treasuries until year end. There could be relief for equities too.
Looking further ahead, to 2024 and beyond, the key idea still stands: a ‘dear, and loose’ policy mix is not constructive for equities or for bonds, in the aggregate. A Trump election victory in 2024 remains a big risk factor for bonds, with Biden trailing Trump in two polls released over the weekend.
The big picture is still the same: structurally higher deficits, with growing fiscal pressures from climate change, climate adaptation, demographics, and global conflicts. Climate change could be a major feature of the 2024 election, with the Republican lawmakers’ election of Mike Johnson as speaker, potentially deepening the divide on the issue. President Biden’s 2030 offshore wind goals have already been dealt a major blow. Rowing back on key climate pledges would entail further risks for US Treasuries.
