There is only one thing Donald Trump fears more than an orange makeup shortage or a windy day: high interest rates.
- Higher rates make Federal Debt more expensive to service – pushing up deficits and requiring even more borrowing.
- Our economy thrives off of cheap credit (low rates) – the stock and real estate markets in particular.
Further, Peter St. Onge says that every 1% cut in the Fed Funds Rate results in 1 million new jobs, and Trump likely falls in that camp as well.
Mr. Trump has been losing a lot of sleep lately, as the 30 Year Treasury hit levels we have not seen for 19 years.
The bond market is concerned about high oil prices, inflation, and record deficits, among other things – and is thus demanding higher yields.
Enter Treasury Secretary Scott Bessent.
The Treasury is buying long-term bonds (10, 20, and 30 year) with short-term T-bills that expire in less than one year.
This is not “Quantitative Easing” like the Fed does because the Treasury is not printing money to buy bonds. It is instead borrowing short-term to buy up long-term debt.
Just the announcement is already working to lower rates. A. T-bill yields are lower than 30-year yields, so it saves the government money; B. It will reduce the supply and increase the demand for long-term bonds – and thus lower yields; and C. It provides more “liquidity” for the markets – which they seem to like.
But – will it work long term?
Critics say that it does nothing to solve the problems that are driving rates higher: (1) huge deficits; and (2) inflation.
And George Gammon reminds us repeatedly that the bond market ultimately only responds to two things: (1) inflation expectations; and (2) growth expectations. (As an aside, Mr. Gammon also makes the case that deficits don’t push rates higher; a topic for another blog).
So – yeah, the great debt reshuffle (from long-term to short-term) will work … for a while (see today’s lower yields as an example; the 30 year fell from 5.33% to 5.2%).
But fundamentals always win in the long run.
I suspect it is Mr. Bessent’s hope that it works long enough to help with the midterms.
