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Even as inflation cools, the growing U.S. deficit will force output higher, writes Ed Yardeny.
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The deficit has widened as tax revenue has fallen, but spending on federal programs has risen rapidly.
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The 10-year Treasury yield is likely to remain elevated at around 4.25%-4.5%.
Even as inflation eases, the size of the US federal deficit will force bond markets to hold higher yields, Ed Yardeni wrote on Monday.
The Treasury Department will be pressured to attract T-Bill buyers to offset a government spending glut headed to $2 trillion for the 2023 fiscal year.
“This is the most if not included during the Covid-19 pandemic, although the Biden administration has taken steps to address the shortfall,” Yardeni wrote.
So, as inflation moves toward the Federal Reserve’s 2% target rate, the 10-year Treasury note could rise to around 4.25%-4.50%, the market veteran said.
Usually, deficits shrink as the economy expands, and as the United States moves toward a stronger economy, it expands as more spending is spent on stimulus and welfare programs.
“As a result, the deficit and nominal GDP are inversely related to the unemployment rate and real GDP growth,” Yardeni wrote. “So it’s very unusual to see the ratio growing – as it is now – in times like the current one when the economy is growing and the unemployment rate is close to low levels, recently around 3.5%.”
Although understanding is growing, a It can be a soft landing, cites this year’s decline in tax receipts as part of the deficit. Personal incomes fell to $2.2 trillion in the April-July quarter from a record $2.7 trillion, reflecting strong economic strength in wages and corporate tax receipts.
At the same time, federal spending is increasing rapidly, net interest income, Social Security and Medicare are high costs. Measured over a 12-month period, interest alone earned $628 billion a year.
As spending rises and primary revenue declines, the Treasury must rely on borrowing to finance federal spending.
But the federation pursued a Numerical strictness campaign — that is, allowing assets in the portfolio, including T-bills, to mature and exit without reinvesting their money — and focused on stemming the flow of deposits from commercial banks, while the department relied more on private households and institutional investors to buy bonds. , can increase production to make the products more attractive.
As net income flows into bond mutual funds and ETFs decline, increasing yields may be necessary, Yardeni wrote. As of July, it reached $189 billion. Meanwhile, money market mutual funds fared better, with weekly net inflows exceeding $1 trillion last week.
As of Monday morning, the yield on the 10-year Treasury bill stood at 4.286%, not far from August’s peak of 4.34%.
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