A 7% 10-Year Treasury Yield As The Norm?
Yield Curve Normalization is the phrase of the day. Here’s our take:
Short rates need to come down this year. The short-end of the yield curve will come down at some point in 2024 as the Fed needs to accommodate Treasury. The Fed lost its independence in 2008 when it made itself subordinate to the Treasury to fund the bank bailouts. The 2020/2021 COVID bailout (CARES Act 1.0 and 2.0), Biden’s Infrastructure program and related fiscal spending took the Fed’s Treasury support role to new heights as fiscal spending was amped up to 11 on a 1-10 scale. Multi-trillion dollar fiscal deficits are now the norm. Treasury primarily funds the Government with short-term paper, thus the Fed has to get short rates down in order to prevent the cost of servicing the debt from bankrupting the already bankrupt United States. Fed Funds will be at 2% or lower at some point in 2024. Add March 11th 2024 to your calendar. The Fed’s BTFP bailout facility will expire that day. What will backfill it? Most likely Fed Funds rate cuts to be announced at the Fed’s March FOMC meeting.
What about the 10-year Treasury yield? At some point the 10-year yield needs to move higher if Janet Yellen is ever going to issue the amount of 10-year Treasuries she would like to. Investors want higher yields to hold 10-year paper for the long-term. I believe that before this decade is over, a 6-8% yield on the 10-year Treasury will be the norm. While the U.S. Government is funded by short-term paper, it is long-term paper that funds the real economy.
The Fiscal Squeeze, courtesy of the U.S. Government: On the one hand the Fed will allow CPI to run hot to inflate the Treasury debt away as we wrote in our book, meaning the purchasing power of the Dollar will continue to fall while the cost of capital will increase. This is called a squeeze, courtesy of the United States Federal Government. Better to own physical assets such as commodities, resource rich land, real estate with multiple use cases and high quality equities. Equities will be volatile as we work through economic uncertainty, geopolitical uncertainty, and rate uncertainty, the latter of which is a function of a purely data-dependent Fed that makes it near impossible for investors to plan. Why not abolish the Fed and allow J.P. Morgan to flex the money supply as needed? Let the market set Treasury yields and send the Keynesian Central Bankers home permanently.