The general consensus is that if Trump is able to get the deficit down, rates will fall too.

This is because bond investors will all think… “whew! The U.S. is finally getting its fiscal act together, so its bonds are less risky, and I will accept a lower return…”

BUT George Gammon frequently points out that is not the case.

In March of 2007, the U.S.’s federal debt was about $7 trillion and the yield on the 10-Year Treasury was in the 5% range.

Today, our federal debt is about $37 trillion, and the yield on the 10-Year Treasury is under 4.3%.

Rates FELL over the last 18 years, despite massive deficits and a 5-fold increase in our federal debt.

So, if deficits, the supply of bonds, and our overall debt levels scare investors so much, then why are rates lower today when we have $30 trillion more of debt?

Gammon makes the case that this proves that deficits and the supply of bonds/level of borrowing are irrelevant.

Investors only and always look at growth and inflation expectations – and nothing else, including the supply of bonds.

He further points out that more government spending and borrowing can actually LOWER rates because it slows economic growth so much.

Economies grow much faster with less government spending and borrowing.

Ironically, lower deficits can foster higher rates because less borrowing and spending results in faster economic growth.

Trump Nominates New Fed Governor and Rates Rise – Uh Oh!

QE Infinity made the case today (along with many other analysts) that rates rose today in response to Trump’s new “dovish” nominee for the Fed.

“Dovish” means the person is more likely to push for lower rates.

So, it’s kind of scary that rates went up, as investors demand higher yields for two reasons: (1) They expect more inflation; or (2) They expect more economic growth (see above).

So, this is a warning that the cuts to the Fed Funds Rate that many analysts are predicting may result in higher long-term rates just like we saw last year.

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About the Author

Jay Voorhees
Jay Voorhees is the Founder of JVM Lending. He specializes in mortgage rate movements, housing market trends, Fed policy, and refinancing strategy. Jay has 25+ years in mortgage banking and has personally originated over $1 billion in residential loans.
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