It’s no mystery why yields are surging: supply and demand. There’s going to be a lot of government debt, and the central bank is now a seller of said debt. From Tyler Durden at zerohedge.com:
When we commented last night on the Senate’s proposed bipartisan “deficit-busting” spending deal – one which will raise spending caps by $300bn over the next two years and incorporate a suspension of the debt limit until March 2019 – we observed that “the agreement will achieve one thing – lead to a surge in US debt issuance, and – by implication – even higher yields, leading to an even steeper drop in the market, not to mention more frequent VIX-flaring episodes.”
With yields jumping and stocks sliding, so far this prediction appears on target.
As a reminder, one month ago Goldman predicted that US debt issuance would more than double, rising from $488bn in 2017 to $1,030 billion in 2018.
Of course, now that the spending caps have been raised by $300 billion, this implications is that the US deficit will surge, and net Treasury debt supply – needed to fund the deficit – in 2018 will get even bigger, something which is duly reflected in today’s surging 10Y yield.
But how much will the proposed deal spike the US deficit by? In a note from BofA’s chief rates strategist, Mark Cabana, we find the answer:
Assuming the bill becomes law, our deficit and Treasury supply estimates will be marked higher.
Yesterday’s bipartisan Senate agreement included a deal to fund the government beyond 8 February and boost spending levels for defense and non-defense programs over the next two years. The $300bn increase over the next two years is modestly larger than we expected and caused us to raise our deficit forecasts by $35bn and $20bn to $825bn and $1,070bn, respectively, assuming the law passage (Table 1).
Not all of the cap increase will translate into direct spending in each fiscal year given actual outlays can be spread over several years. Moreover, some of the increase in the spending caps came from budget gimmicks that just shifted funding toward domestic nondefense spending from other budget provisions; this is why our deficit estimates boost is below the total cap increase. The increase in disaster relief spending was generally in line with our estimates, which did not result in any revisions.
To continue reading: Unleash The Debt: Why The Senate Budget Deal Is Sending Yields Surging