Rates Fall Sharply - As The Third Thing Keeping Rates High Is Mitigated

Rates Fall Sharply – As The Third Thing Keeping Rates High Is Mitigated

By Jay Voorhees

February 5, 2025 3 min read

Rates Fall Sharply – As The Third Thing Keeping Rates High Is Mitigated

One of the many things panicking the entire world is this:

How will the market absorb the trillions of dollars in Treasury Bills and Bonds the U.S. will have to issue this year to cover its massive deficits and to refinance all of the short-term debt that is coming due and will have to be refinanced this year?

The panic is well justified too, as an unprecedented $6 trillion of Treasury debt is maturing by June and will need to be refinanced, per this Kobeissi Letter post.

Most of that debt will have to be refinanced at much higher rates too – which will exacerbate the deficit problem that much more.

The Two Primary Factors That Influence Long-Term (Mortgage) Interest Rates

I repeat time and again that the two primary factors that drive long-term interest rates are: (1) economic growth expectation; and (2) inflation expectations.

There is a third factor though: concerns about the oversupply of Treasury debt coming to market.

There is much talk on X about the 10 Year Yield potentially shooting to 6% (from 4.4% today) if too much Treasury debt hits the market. If the 10 Year Treasury hits 6%, we’d see 9% mortgage rates – so, yes, that would be a bad thing.

So – What Happened Today That Pushed Rates Sharply Lower?

The Treasury announced today that it will not be increasing its auction sizes (or increasing the amount of debt coming to market), and the reaction was positive to say the least.

The market also seems to be responding positively to the government spending cuts that the current administration is finding.

Rates fell in response to negative economic news overseas too.

George Gammon often points out though how the volume of government debt does not end up impacting rates the way investors fear.

In September, I wrote this blog: Why Government Deficit Spending Will NOT Push Up Rates Or Cause Inflation. I explained how our government debt rose from $9+ trillion in 2008 to $35 trillion in 2024 – while the 10 Year Treasury Yield remained largely the same.

So investors’ fears about volume may not be justified.

Probably not.

Foreign governments dump our debt because they are desperate to get badly needed dollars to pay for imports and to pay off dollar-denominated debts. They are not doing so because they think we borrow too much.

In addition, if foreign governments wanted to dump our debts because they fear our excess borrowing or because they want to stick it to Mr. Trump, they would have no place to park that money given how much more precarious much of the rest of the world is.