The Treasury Yield Curve Will Right Size in 2024
Debt Mountain
The 10-year Treasury yield will break 5% next week and will likely sit above 5% at week’s end.
Fed Funds rate: The Fed will be forced to lower its Fed Funds rate next year so that the interest expense on the $33.6 Trillion National debt does not get completely out of control. My sense is that during Q2 of 2024 we will see 5, 7, 10, 20 and 30-year Treasury yields above the Fed Funds rate, thereby normalizing the yield curve.
Return of QE: Eventually the Fed will step back into the bond market with a QE program to control the long-end of the yield curve. There is simply too much Treasury debt outstanding to let the long-end of the curve float. Unfortunately, we have a Debt problem that can only be solved by radically reducing the amount of fiscal spending by Washington. I just do not see that happening.
More Treasury Debt: I can see Washington adding to the National debt load with a massive omnibus spending bill sometime in the second half of November of this year or in December. I can see Washington creating more inflation in 2024 as a result of that spending bill. I can see the Biden Administration floating a stimulus package around July 4th 2024 where Americans will be mailed checks again. I can see this type of stimulus become institutionalized as Universal Basic Income (UBI) in 2025 should the Dems win the General Election in November 2024. All of these elements will dramatically increase the National debt, pushing it well above $40 trillion over the next several years. I suspect that within the next 10-20 years Social Security benefits will be cut to instead make short-term UBI payments and to fund other expenses that the U.S. does not need such as supporting wars in Eastern Europe and the Middle East.
Janet Yellen should be fired and jailed: I still can’t believe that Treasury Secretary Janet Yellen issued so much short-term Treasury debt during 2021 and 2022 when interest rates were at zero percent or near zero percent. That bone-headed decision mandated that her short-term Treasury paper be rolled over near-term at a time when Fed Chairman Jerome Powell was telling the world that he would take the Fed Funds rate higher. It is as though Yellen knowingly increased the debt service load on a U.S. economy that was already suffocating under a mountain of Treasury debt that saw the Debt-To-GDP ratio well above 1x. Yellen’s short-term Treasury auctions during the 2021-2022 period required a special kind of stupid. Americans will feel the pain as a result of her actions as Interest Payments crowd out other forms of Government spending. The knuckleheads in Congress as well as spend-happy Presidents present and past all share in the blame.