The 10-Year Could Go Much Higher Than 5% Long-Term
Talking heads are floating a yield range of 5.25-5.50% as a potential new high on the 10-year Treasury. If the Fed keeps Fed Funds unchanged next meeting, the 10-year could go much higher than 5.50%.
More interesting will be the next printing cycle. The Fed will ultimately lower rates, Washington will ramp up spending, and Treasury will ramp up Treasury issuances. Where will demand for Treasuries come from?
As we covered in Ep. 489 of the TEK2day Podcast (below), there is less sovereign demand for long-term Treasuries versus 10 years ago. Smart institutions don’t want to own long-term Treasuries. This leaves the Fed to mop up the mess. The Fed is not only the lender of last resort (Discount Window), it has become the buyer of last resort, subsidizing the Federal Government’s outlandish spending. Treasury yields need to move higher in order for Treasury to drive auction demand.
In addition, the market will drive yields higher over time. What market participant wants to own debt issued by a Government that is technically bankrupt were it not for its ability to print money from thin air? What market participant wants to own U.S. issued paper where the underlying collateral is a Government that runs $1-3 Trillion deficits each year? What market participant wants to own Treasuries when the cost of servicing those Treasuries is approximately 25% of Federal Tax Receipts and moving higher as a percentage of the pie? All of these factors will push LT Treasury yields higher over time.