Category Archives: U.S. Treasury Bonds

Yen Carry Trade and Market Sell-Off

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A lot of money was raised in Japan at 0% interest rates and used to speculate in equities in other parts of the world.

The “Yen carry trade” refers to investors borrowing money at near-zero interest rates in Japan, and then redeploying that cash into higher-yielding assets around the world, such as stocks and bonds.

Typically, the Japanese yen carry trade is where the cheap cash raised in Japan is redirected into higher-yielding US Treasury notes, with investors collecting the difference between the interest rates set by the Bank of Japan and the Federal Reserve. But, the yen carry trade had spilled over into other assets like stocks.

On Monday, the Bank of Japan unexpectedly raised interest rates 15 basis points last week amid the prospect of rate cuts by the Federal Reserve, the yen has strengthened. That’s sparked a wave of margin calls, leading to speculators unwinding their positions and selling stocks.

The equity market selloff was to a large extent attributable to the unwind of the yen carry trade.

References:

  1. https://markets.businessinsider.com/news/stocks/stock-market-crash-yen-carry-trade-unwind-fed-japan-rates-2024-8

Inverted Yield Curve and the U.S. Treasury 10 Year

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Given the inverted yield curve and its correlation to predicting recessions, the risk of recession is still elevated, explains Collin. The yield curve is inverted when long-term treasury yields fall below short-term treasury yields.

For example, the 10-year treasury yield is about 3-1/2% %, but the two-year treasury yield is about 4%. And the yield curve tends to invert once the markets begin pricing in Fed rate cuts and tends to send long-term yields lower. Long-term yields like that 10-year treasury yield are often based on Fed Funds Rate expectations over the next 10 years or so. So if the Fed Funds Rate is 5% like it is today, but the Fed Funds Rate is expected to be lower in a year or two, you’ll tend to see longer term yields decline to sort of average out what the Fed Funds Rate might be over the next number of years.

An inverted yield curve is usually followed by a recession. When the Fed hikes rates, it often slows growth along with inflation. It doesn’t necessarily just bring inflation down. When the Fed hikes rates, things in the economy and financial markets tend to break. Maybe the economy slows, maybe corporate defaults pick up, but any way you slice it, there can be negative consequences from Fed rate hikes. So when things break, the Fed then tends to cut rates to stimulate the economy, which can un-invert the yield curve. For example, short-term Treasury bills or treasury notes could fall if and when the Fed cuts rates and they tend to fall below that level of long-term yields.

Now, we think that’s what’s led to the yield curve being less inverted now, it’s really just due to expectations of sooner than expected rate cuts, so short-term rates have fallen more than long-term yields have declined. But if an inverted yield curve is usually followed by a recession, that doesn’t mean that the fact that the yield curve is becoming less inverted is sending a positive signal about the economy.

Just the presence of rate cut expectations tells us that the likelihood of a recession is on the rise, mainly because the Fed cuts rates when they need to, when they need to stimulate the economy. And we think, unfortunately, the Fed will tighten enough right now, not just to slow inflation, but they’ll likely weaken the labor market, which can lead to slower consumer spending, and then the risk of recession is still there.

References:

 

This 10-year Treasury Yield

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The 10-year Treasury yield is closely watched as an indicator of broader investor confidence.

The U.S. Treasury 10-year note yield signals investor confidence in the overall economy and markets. Investors pay keen attention to movements in 10-year Treasury yields because they serve as a benchmark for other borrowing rates, such as mortgage rates. When the 10-year yield fluctuates, it can have significant implications across the financial landscape, according to Forbes.

The U.S. Treasury issues 10-year T-notes at a face value of $1,000, and a coupon specifying a certain amount of interest to be paid every six months. The notes are sold through auctions conducted by the Federal Reserve and yields are set through a bidding process. The notes can be resold to other investors in the secondary market.

Changes in the 10-year Treasury yield tell investors a great deal about the economic landscape and global market sentiment. Professional investors analyze patterns in 10-year Treasury yields and make predictions about how yields will move over time.

When confidence is high, prices for the 10-year drop and yields rise. This is because investors feel they can find higher-returning investments elsewhere and do not feel they need to play it safe. Thus, gains in yield signal global economic confidence

Declines in the 10-year Treasury yield generally indicate caution about global economic conditions.

  • BecauseTreasury securities are backed by the U.S. government, They securities are seen as a safer investment relative to stocks.
  • Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
  • The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.
  • A rising yield indicates falling demand for Treasury bonds, which means investors prefer higher-risk, higher-reward investments. A falling yield suggests the opposite.

The yield is the rate that people refer to when they’re talking about Treasuries. The coupon rate, while technically the interest rate you will receive in relation to the Treasury’s face value, will likely be different from the effective yield you end up getting. If you pay less than face value, your effective rate will be higher; more and it will be lower.

Prices (and therefore effective yields) change for bonds almost constantly. That’s because a bond’s price is inversely related to yield: When demand is high and Treasury prices rise, yields fall—conversely, when demand is low Treasury prices fall and yields rise.

Rising yields may signal that investors are looking for higher return investments but could also spook investors who fear that the rising rates could draw capital away from the stock market.

References:

  1. https://www.forbes.com/advisor/investing/10-year-treasury-yield/

Benchmark 10-year Treasury Yield

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Short term US Treasury yields reached their highest level since July 2007 last week, after new official data revealed the US economy is still coming in hot, reports Forbes Magazine.

The benchmark 10-year Treasury yield climbed to 3.87%, while the 2-year rate advanced to 4.669%. The one-year Treasury yields briefly hit 5%. The last time the it hit those levels was July 2007.

High yields affect the price of bonds, which are considered to be the ultimate safe investment. They’ve been sensitive to the new data on the US economy’s health, which isn’t behaving as the Fed expected.

The ten-year Treasury yields, which many use as a benchmark for the economy, hit their highest level since December 30.

Treasury yields are kind of a big deal. They influence how much it costs the US Government to borrow money, how much interest bond investors will get and the interest rates everyone pays on loans.

And the 10-year Treasury yield is the jewel in the crown. It’s used to measure mortgage rates and confidence in the market. If the yields are higher here, it could grind the housing market to even more of a halt.

  • Treasury yields hit new highs in February, with 10-year yields hitting 3.86% and two-year reaching 4.6%
  • The highs come after data on labor and prices showed the US economy still had a long way to go to get inflation down
  • 10-year vs. 2-year bond yields are currently in an inverted curve, which historically has predicted a future recession

An inverted yield curve happens when the shorter-term yields have higher returns than the long-term yields. An inverted curve has historically meant a recession is on the way, and that can be enough to scare off banks from lending.

Investors are worried that stubborn inflation will lead the Federal Reserve to keep raising rates and to keep rates higher for longer — which could tip the economy into a recession.

References:

  1. https://www.forbes.com/sites/qai/2023/02/20/treasury-yields-hit-new-heights-is-inflation-set-to-stick-around/amp/

The 10-Year Treasury Bond Yield

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The 10-year Treasury bond yield is closely watched as an economic indicator of broader investor confidence.

An economic indicator is a piece of economic data, usually of macroeconomic scale, that is used by analysts to interpret current or future investment possibilities, according to Investipedia. .

This 10-year bond signals investor confidence. The U.S Treasury sells bonds via auction and yields are set through a bidding process.5 When confidence is high, prices for the 10-year drop and yields rise. This is because investors feel they can find higher-returning investments elsewhere and do not feel they need to play it safe.

But when confidence is low, bond prices rise and yields fall, as there is more demand for this safe investment.

This confidence factor is also felt outside of the U.S. The geopolitical situations of other countries can affect U.S. government bond prices, as the U.S. is seen as safe haven for capital.

  • BecauseTreasury securities are backed by the U.S. government, They securities are seen as a safer investment relative to stocks.
  • Bond prices and yields move in opposite directions—falling prices boost yields, while rising prices lower yields.
  • The 10-year yield is used as a proxy for mortgage rates. It’s also seen as a sign of investor sentiment about the economy.
  • A rising yield indicates falling demand for Treasury bonds, which means investors prefer higher-risk, higher-reward investments. A falling yield suggests the opposite.

Changes in the 10-year Treasury yield tell long-term investors a great deal about the economic landscape and global market sentiment. Professional investors analyze patterns in 10-year Treasury yields and make predictions about how yields will move over time.

Declines in the 10-year Treasury yield generally indicate caution about global economic conditions while gains signal global economic confidence.

Prices (and therefore effective yields) change for bonds almost constantly. That’s because a bond’s price is inversely related to yield: When demand is high and Treasury prices rise, yields fall—conversely, when demand is low Treasury prices fall and yields rise. This ebb and flow ultimately creates the Treasury pricing market as people flock to (and then from) Treasuries based on the economic environment they find themselves in.

It’s important to remember, all U.S. Treasury securities are regarded as risk free—since they’re backed by the full faith and credit of the United States government, which has never defaulted on its debts.

When investors get worried about the economy and market risk, they look for safe investments that preserve capital, and Treasuries are among the safest investments out there.

One of the foundational principles of finance is that risk and return are correlated. When markets are booming and the economy is expanding, the appetite to take on risk and generate returns is high. Risk-free Treasuries become much less appealing because of their lower returns. Demand declines and Treasury notes sell at less than their face value.

References:

  1. https://www.forbes.com/advisor/investing/10-year-treasury-yield/

The 10-Year Treasury Yield: A Barometer of the Economy

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When confidence is high, the ten-year treasury bond’s price drops and yields go higher because investors feel they can find higher returning investments and do not feel they need to play it safe.

The 10-year treasury bond is a debt instrument issued by the government of the United States. As its name implies, it matures in ten years. Over the course of that time, investors holding 10-year treasury notes, earn yields. The 10-year T-notes are issued at a face value of $1,000, and a coupon specifying a certain amount of interest to be paid every six months.

The importance of the ten-year treasury bond yield goes beyond just understanding the return on investment for the security. When confidence is high, the ten-year treasury bond’s price drops and yields go higher because investors feel they can find higher returning investments and do not feel they need to play it safe.

Like other types of investments, commercial property investors follow the,10-year treasury bond yield trends because it serves as a proxy indicator for things like mortgage rates. Put another way, as the 10-year treasury bond goes, so goes mortgage rates.

The 10-year treasury bond is important to commercial property investors because it acts as a strong indicator of how the macroeconomy will move in the short-term. The 10-year note price is determined by four factors: the face value, the dollar price, interest rate, and yield, writes Forbes.

  1. Face value, also referred to as “par,” is the price the government agrees to pay out at maturity.
  2. The dollar price is the amount paid for the bond, relative to its face value.
  3. The interest rate is the amount of interest paid over the life of the note.
  4. And, the yield, is a combination of the dollar price and the interest rate.

The 10-year treasury bond’s performance, as mentioned above, is a strong indicator of how the U.S. economy is currently performing and is forecast to perform in the future. Which means, since the 10-year note is a proxy for mortgage interest rates, that’s a very important metric to commercial property investors.

After all, if mortgage interests rates rise, the long-term cost of buying commercial property goes up. Meaning the ROI might shrink. However, if the forecast is for mortgage rates to fall, then commercial property investments become more lucrative over the long-term.

Changes in the 10-year Treasury yield tell us a great deal about the economic landscape and global market sentiment, professional investors analyze patterns in 10-year Treasury yields and make predictions about how yields will move over time. Declines in the 10-year Treasury yield generally indicate caution about global economic conditions while gains signal global economic confidence.

It’s the action in the secondary market that determines the yield. This is important to note because it’s this rate that people refer to when they’re talking about Treasuries. The coupon rate, while technically the interest rate you will receive in relation to the Treasury’s face value, will likely be different from the effective yield you end up getting. If you pay less than face value, your effective rate will be higher; more and it will be lower.

Prices (and therefore effective yields) change for bonds almost constantly. That’s because a bond’s price is inversely related to yield: When demand is high and Treasury prices rise, yields fall—conversely, when demand is low Treasury prices fall and yields rise. This ebb and flow ultimately creates the Treasury pricing market as people flock to (and then from) Treasuries based on the economic environment they find themselves in.

The 10-year Treasury yield serves as a vital economic benchmark, and it influences many other interest rates. When the 10-year yield goes up, so do mortgage rates and other borrowing rates. When the 10-year yield declines and mortgage rates fall, the housing market strengthens, which in turn has a positive impact on economic growth and the economy.

Bond market volatility is usually a sign of a weakening economy. The recent U.S. Treasury yield fluctuations have given market strategists reasons to be concerned about looming economic issues. Studies and empirical evidence show a volatile U.S. Treasury note market is not good for foreign countries holding U.S. T-notes and dealing with significant debt issues, writes Bitcoin.com. That’s because when U.S. T-notes are leveraged for restructuring purposes and a resolution tool, “sudden and sweeping daily swings” can punish countries trying to use these financial vehicles for debt restructuring.

The 10-year Treasury yield also impacts the rate at which companies can borrow money. When the 10-year yield is high, companies will face more expensive borrowing costs that may reduce their ability to engage in the types of projects that lead to growth and innovation.

Higher 10-year Treasury yields should help cool down the economy and bring down decade high inflation in the long run.

The 10-year Treasury yield can also impact the stock market, with movements in yield creating volatility.

  • Rising yields may signal that investors are looking for higher return investments but could also spook investors who fear that the rising rates could draw capital away from the stock market. It can also means that borrowing is getting more expensive.
  • Falling yields suggest that corporate borrowing rates will also decline, making it easier for companies to borrow and expand, thus giving equities a boost.

All U.S. Treasury securities are regarded as relatively risk free—since they’re backed by the full faith and credit of the United States government, which has never defaulted on its debts. When investors get worried about the economy and market risk, they look for safe investments that preserve capital, and Treasuries are among the safest investments globally.

References:

  1. https://dieselcommercialgroup.com/why-the-10-year-treasury-bond-is-so-important/
  2. https://www.forbes.com/advisor/investing/10-year-treasury-yield/
  3. https://news.bitcoin.com/investors-are-running-out-of-havens-erratic-behavior-in-us-bond-markets-points-to-deep-recession-elevated-sovereign-risk/

The Debt Ceiling and Congressional Brinkmanship

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“I could end the deficit in 5 minutes. You just pass a law that says that anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Warren Buffett, Chairman and CEO, Berkshire Hathaway

Around October 18, Treasury Secretary Janet Yellen and the U.S. Treasury Department have warned Congress that the government will no longer be able to pay all its bills unless the $28.5 trillion statutory debt ceiling is increased or suspended.

Source: Congressional Research Service, Congressional Budget Office, and the Treasury Department. Data as of 05/01/2021.

Moreover, Secretary Yellen believes the economy would fall into a recession if Congress fails to address the borrowing limit before an unprecedented default on the U.S. debt.

While the U.S. has never failed to pay its bills, economists say a default would tarnished faith in Washington’s ability to honor its future obligations on time and potentially delay Social Security checks to some 50 million seniors and delay pay to members of the U.S. armed services.

“If you ask the question of Americans, should we pay our bills? One hundred percent would say yes. There’s a significant misunderstanding on the debt ceiling. People think it’s authorizing new spending. The debt ceiling doesn’t authorize new spending; it allows us to pay obligations already incurred.” Peter Welch (D-VT), U.S. House of Representatives Democratic Caucus Chief Deputy Whip

Increases to the debt ceiling aren’t new. They’ve occurred dozens of times over the last century, mostly matter-of-factly, a tacit acknowledgement that the bills in question are for spending that Congress has already approved.

One thing separating today’s debt debate from those of the past is the larger-than-ever national debt, according to Fidelity. Publicly held US debt topped 100% of GDP in 2020 and is expected to reach 102% by the end of 2021.

And the debt is projected to increase significantly in the future. The Congressional Budget Office (CBO) projects a federal budget deficit of $2.3 trillion in 2021—the second largest deficit since 1945.

Source: Congressional Budget Office, as of February 11, 2021.

Failure to address the current challenge could shake global markets even before the Treasury has exhausted its available measures to pay bills. A U.S. debt default, whether through delayed payments on interest owed on U.S. Treasuries or on other obligations, would be unprecedented.

The effect would be one of perception. And, perception can be tied to the reality that someone isn’t going to be paid on time, whether it be government contractors, individuals who receive entitlement payments, or someone else. The damage to U.S. credibility would be irreversible.

Even if a default were only technical—if payments other than interest on debt were delayed—the United States could no longer fully reap the benefits bestowed on the most reliable debtors.

Interest rates would likely rise, as would financing costs for businesses and individuals. Debt ratings would be at risk. The government’s own financing costs, borne by taxpayers, would increase. Stock markets would likely be pressured as higher rates made companies’ future cash flows less predictable. Such developments occurring while economic recovery from the COVID-19 pandemic remains incomplete makes the potential scenario all the more important to avoid.

Let it be said that no one doubts the ability of the United States to pay for its obligations, according to Vanguard. There is a minimal credit risk posed by the United States is supported by its strong economic fundamentals, excellent market access and financing flexibility, favorable long-term prospects, and the dollar’s status as a global reserve currency.

The House has passed a measure that would suspend the debt ceiling through mid-December of 2022, and the bill now goes to the Senate. Republicans in the Senate oppose any effort to raise the borrowing limit and appears intent on making Democrats address it as part of their sprawling investment in social programs and climate policy under reconciliation.

Senate Democrats could lift the debt ceiling without the GOP votes through reconciliation, although that would come with downsides. Under reconciliation, a simple majority of senators can pass a very small number of budget bills each year. The process is sufficiently complex that it would probably take a couple of weeks and distract Democrats from their negotiations over Biden’s “Build Back Bette” agenda.

Thus, the Democrats resist raising the debt ceiling through reconciliation if it means potentially sacrificing other policy goals. And, the rules for reconciliation would require Democrats to specify a new limit for the national debt which would expose them to potentially uncomfortable GOP political attack ads.

Republicans insist that since Democrats control both the executive and the legislative branches and are in a socialistic tax-and-spend binge, they should bear sole responsibility for dealing with the debt limit, which is rearing its ugly head again because the suspension included in a two-year 2019 budget deal expired on July 31.

Democrats argue that Republicans should share the burden of this unpopular chore, since (a) much of the debt involved was run up under Republican presidents and (b) Democrats accommodated Republicans on debt-limit relief during the Trump presidency.

For long term investors, it’s clearly in the best interest of the country to resolve any debt-ceiling issues, according to Fidelity. And, it’s important to understand that there will always be times of uncertainty. It’s important to take a long-term view of your investments and review them regularly to make sure they line up with your time frame for investing, risk tolerance, and financial situation.

References:

  1. https://investornews.vanguard/potential-u-s-debt-default-why-to-stay-the-course/
  2. https://www.cnbc.com/2021/10/05/debt-ceiling-us-faces-recession-if-congress-doesnt-act.html
  3. https://nymag.com/intelligencer/2021/10/democrats-can-raise-debt-ceiling-via-reconciliation-bill.html
  4. https://www.fidelity.com/learning-center/trading-investing/2021-debt-ceiling

Loss of Purchasing Power: Is $1 million enough for retirement?

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“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”

Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago.  There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.

As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.

Retirement is not an age, but a number

Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.

It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.

A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.

Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.

One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money.  For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and  lifestyle.

Taking the financial road less traveled

Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash.  Although this may seem the less risky road to take in your retirement years, a few experts do not agree.  If you expect to maintain your purchasing power into future, you must stay invested in stocks.

“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”

“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.

According to the article, there are five circumstances when retirees should eskew conventionl wisdom:

  1. The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
  2. If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
  3. When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power.  Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
  4. If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
  5. For historical purposes. The stock market has outperformed all other asset classes over the last century.

In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.

Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds.  Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.

References:

  1. https://www.fool.com/ext-content/is-1-million-enough-for-retirement/
  2. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/worried-about-retirement-pimcos-plan-to-help-retirement-savings-last-a-lifetime
  3. https://money.usnews.com/investing/articles/2017-07-24/5-reasons-to-stay-in-the-stock-market-in-your-60s
  4. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/income-to-outcome-pimcos-retirement-framework
  5. https://money.usnews.com/money/blogs/on-retirement/2011/03/22/why-retirement-is-not-an-age

Rising Bond Yield Leads to Market Sell-off | CNBC

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The culprit behind the recent stock market sell-off was the rapid rise in 10-Year U.S. Treasury bond yields. The 10-year Treasury yield remained above 1.4%, after surging to 1.6% in the previous day session to its highest level since February 2021 and more than 0.5% higher since the end of January, according to CNBC.

The spike in the 10-year yield , which is used as a benchmark for mortgage rates and auto loans, is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, which should benefit corporate profits. But the move could also signal faster-than-expected inflation ahead. The sheer pace of the rise has also had the effect of dampening investors’ appetite for richly valued areas of the market like technology and other growth stocks. Higher rates reduce the value of future cash flows so they can have the effect of compressing equity valuations.

All three stock benchmarks — Dow Jones Industrial Average , Nasdaq and S&P500 — were tracking for weekly losses ahead of the final trading day of February. The Nasdaq was down nearly 7% from its February 12, 2021, record closing high. The Dow and S&P 500 both remain solidly in the green for the month. However, the S&P 500 was off almost 2.7% from its last record closing high, also on February 12, 2021, and the Dow had its worst day in nearly a month on Thursday.

Additionally, inflation concerns are being stoked on the thought that the $1.9 trillion COVID-19 stimulus bill — which passed the House of Representatives — on top of accelerating growth could overheat the economy.

Economists and investment managers say the bond market is reacting to positive economics as vaccines are rolled out and GDP forecasts improve, which should benefit corporate profits. But the move could also signal faster-than-expected inflation ahead.

References:

  1. https://www.cnbc.com/2021/02/26/5-things-to-know-before-the-stock-market-opens-feb-26-2021.html

Federal Debt has Surpassed the Size of the U.S. Economy | New York Times

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By Matt Phillips. Aug. 21, 2020 Updated 7:48 a.m. ET

The national debt of the United States now exceeds the size of the nation’s gross domestic product. That was once considered by economists a doomsday scenario that would wreck the U.S. economy. So far, that hasn’t happened.

“Economists and deficit hawks have warned for decades that the United States was borrowing too much money. The federal debt was ballooning so fast, they said, that economic ruin was inevitable: Interest rates would skyrocket, taxes would rise and inflation would probably run wild.”

“The death spiral could be triggered once the debt surpassed the size of the U.S. economy — a turning point that was probably still years in the future.”

“It actually happened much sooner: sometime before the end of June 2020.”

“”This is a 40-year pattern,” said Stephanie Kelton, a professor of economics and public policy at Stony Brook University and a proponent of what’s often called Modern Monetary Theory. That view holds that countries that control their own currencies have far more leeway to run large deficits than traditionally thought. “The whole premise that deficits drive up interest rates, it’s just wrong,” she said.”

“At the end of last year, the United States was about $17 trillion in debt — roughly 80 percent of the gross domestic product. In January, government analysts predicted that debt would approach 100 percent of the G.D.P. around 2030. But by the end of June, the debt stood at $20.63 trillion, or roughly 106 percent of G.D.P., which shrank amid widespread stay-at-home orders. (These numbers don’t count trillions more the government owes itself in bonds held by the Social Security and Medicare trust funds.)”

“Economists have long told a story in which debt levels this large inevitably ignited an economic doom loop. Towering levels of debt would freak out Treasury bond investors, who would demand higher interest rates to hand their cash to such a heavily indebted borrower. With its debt payments more expensive, the government would have to borrow even more to stay current on its obligations.”

“Neither tax increases nor spending cuts would be attractive, because both could slow the economy — and any slowdown would hurt tax revenues, meaning the government would have to keep borrowing more. These scenarios frequently included dire predictions of soaring interest rates for business and consumer borrowing and crushing inflation as the government printed more and more money to pay what it owed.”

“But instead of panicking, the financial markets are viewing this seemingly bottomless need for borrowing benignly. The interest rate on the 10-year Treasury note — also known as its yield — is roughly 0.7 percent, far below where it was a little over a year ago, when it was about 2 percent.”

“There’s a debate about whether a large amount of government debt hamstrings economic growth over the long term. Some influential studies have shown that high levels of debt — in particular debt-to-G.D.P. ratios approaching 100 percent — are associated with lower levels of economic growth. But other researchers have found that the relationship isn’t causal: Slowing economic growth might lead to higher levels of debt, rather than vice versa.”

“Others have found that they don’t see much of a relationship between high levels of debt and slow economic growth for rich developed countries.”

“The experience over the last decade has drastically shifted the way economists and investors think about how the United States funds itself.”

Read more: https://www.nytimes.com/2020/08/21/business/economy/national-debt-coronavirus-stimulus.html?referringSource=articleShare