US fiscal profligacy is the new ingredient in this bond crisis
This is a companion piece to last week’s note about the US 10-year Treasury – Why Yields Could Go to 6%. We think we are in a new trading range of 4.3-5.3% and that the biggest single reason for the change is the administration’s plan for 6% budget deficits until the end of the decade. We think there is a significant risk that it will be self-defeating, and that it is too close for comfort to the Liz Truss plan in the UK. We also think that the Fed is happy for bond markets to preach the virtues of fiscal restraint to the administration and is unlikely to ease rates in the absence of a financial accident. The latter is, of course, the most likely outcome of such a dramatic rise in yields.