Market Yields on the Rise Again

After showing signs of flattening out last week, U.S. Treasury market yields climbed again on Monday. All maturities except the 1-month bill now yield in excess of four percent. All market yields are above the latest auction yield under respective maturity:

Table 1

Source: U.S. Treasury

Rising yields help attract financial capital to the U.S. economy. Figure 1 reports exchange rates vs. three key European currencies, reported as foreign currency units per $1:

Figure 1

Source: Federal Reserve

A stronger U.S. currency contributes to dampening inflation, as fewer dollars are needed to buy the same imported products. The effect is modest, but nevertheless worth noting. 

To some degree, the strengthening of the dollar is a pull factor for foreign financial investments: so long as the upward trend comes with expectations that it will continue, overseas investors can expect gains both from U.S. equity in their portfolios and from a stronger dollar. Upon selling the equity, they cash in from a higher market price as well as from a stronger dollar.

When expectations of a rising dollar fade away, though, foreign investors can exercise herd behavior, sell their assets quickly and likewise trade their dollars for their currencies of choice. 

A sell-off causing a run on the dollar is unlikely in the near future, but not unthinkable over an extended time horizon. The timing for such an event, if it happens, depends on when investors lose confidence in the ability of the U.S. Treasury to honor its debt payments. 

There are a couple of tripwire variables to look out for in this context, one of them being the average cost of the U.S. debt. As of October 31, this average cost (per our model estimate) is 1.99 percent. This is up from 1.87 percent on October 1. 

As the Treasury auctions new debt in order to replace maturing securities, and to add funding for the federal government's current budget deficit, the marginal yield on every maturity will continue to rise (except the 4-month, which is new). The expected increase in yields on the debt as a whole is significant, given that an estimated 60 percent of the debt is under the 3-10-year maturities. The average interest cost on these maturities is currently $306 billion per year, equal to a 1.64-percent interest.

If the average interest on this share of the debt rises to 1.99 percent, it adds $64.7 billion to the cost of the national debt. This is under the assumption that no new debt is added under these maturities. 

This is, again, for a specific set of U.S. Treasury notes, where the average interest currently is well below the average for the total U.S. debt.

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We do not give investment advice. 

This blog provides analytical information solely for the purposes of 1) predicting the cost of the federal debt, and 2) for assessing the risk for a U.S. fiscal crisis. All information published here, forecasting and other, is based on publicly available data from the U.S. Treasury, including but not limited to approximately 65 percent of the current debt; on macroeconomic data, including but not limited to monetary policy decisions by the Federal Reserve; and on macroeconomic theory.