10-Year Treasury Note Futures (non-commercial holdings): Â Currently net long 137.4k, up 209.1k
The bond market has swiftly priced in higher inflation. The post-election treasury yields rally has been impressive, but questions remain about its sustainability. Just look at the 10-Year Treasury Bond Yield (INDEXCBOE:TNX). The U.S. economy is in its eighth year of expansion, although growth remains subdued.
On a 12-month rolling total basis, the federal deficit has been rising since January this year – from $405.3 billion to $587.4 billion in September.  In the past, deficit was as high as $1.5 trillion in February 2010. As a result, issuance of Treasury notes and bonds peaked at $1.7 trillion in June that year. Last month, issuance was $476 billion.
If president-elect Trump succeeds in pushing through his big infrastructure spending plan, deficit in all probability will continue to rise, which then means more Treasury issuance. The 5-year, 5-year inflation expectation rate – up from 1.89 percent on November 8 (election day) to 2.06 percent two sessions later, before backing off to two percent – is sniffing inflation.
The rub in all this is debt. Federal debt stood at $19.4 trillion in 2Q16; interest payments were at a seasonally adjusted annual rate of $471.7 billion – about on par with $456.6 billion five years ago. Between the periods, debt went up by $5 trillion; the 10-year yield, however, went from 3.2 percent to 1.5 percent, which made all the difference insofar as interest payments were concerned.
The 10-year yield bottomed at 1.34 percent on July 6 this year, closing the week at 2.34 percent – up 100 basis points in four months. In 2Q16, as a share of federal debt, interest payments comprised 2.43 percent. Simplistically, if we add 100 basis points to this, 2Q16 interest payments would have gone up by $193 billion.
The debt load is simply too big – and heading higher – for markets to allow a persistent rise in interest rates without substantially hurting the economy.
For further reference, here’s a look at 30 Year Treasury Bond Yields (INDEXCBOE:TYX) vs COT positioning:
Thanks for reading.
Note that the change in COT report data is week-over-week. Excerpts of this blog post originally appeared on Paban’s blog.
Twitter:Â @hedgopia
Author may hold a position in mentioned securities at the time of publication. Â Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.