The U.S. economy continues to move slowly down the path toward a fiscal crisis. The latest numbers on debt-yield levels confirm this almost glacial, but increasingly inevitable, trend.
In one month the shortest Treasury, the one-month bill, has fallen from 0.09 percent to 0.03 percent. In the same time span the 30-year bond – the longest debt instrument issued by the U.S. Treasury – has risen from 1.88 percent to 2.01 percent.
In other words, the short- and long-term interest rates on U.S. debt are diverging. This is a trend that we saw the first hints of already in September, when the 30-year bond started rising while the one-month bill remained flat within the 1-1.25-percent yield bracket. In November, the one-month bill fell to average about one percent, but its yield remained relatively stable until a month ago.
After January 12, the one-month yield has taken a nosedive. Meanwhile, the 30-year bond continued to rise, leaping above 1.75 percent in early January. On February 12 it passed two percent in yield, reaching 2.01 percent. It has not been this high since February 19, 2020:
The divergence in yield is indicative of increased uncertainty among investors about the U.S. Treasury’s ability to honor its debt over the long term. This uncertainty is even more pronounced in Figure 2, which contrasts the average yields on long-term bonds (10, 20 and 30 years) with the average yields on the shortest-term bills (one, two and three months):
The averages are not weighted by trade volume, but they still show how investors are gravitating toward short-term debt. The depression of yield is the result of an increase in demand for the instrument, given market supply. When the price rises, the yield falls.
When investors grow concerned about the long-term reliability of sovereign debt, they first sell off long-term instruments and concentrate their holdings to those with shorter maturity dates. The next step is to divest oneself of all debt issued by that government. When this happens, interest rates rise across the board.
The U.S. is not at that point and probably will not be for some time. However, the first indication of weakening trust – the shift to short-term debt – is already here.
In addition to concerns over debt reliability – the capacity of the U.S. Treasury to honor its debt obligations – it is also important to keep the inflation factor in mind. As we have reported abundantly here on The Liberty Bullhorn, there is a clear inflation pressure building in our economy. When inflation rises, the real value of investment income declines.
Shareholders can compensate for the loss of real value in dividends by capitalizing on rising stock values; this is by definition a speculative strategy for earning money, but at least the stock-market investor has that opportunity. Investors in sovereign debt have limited opportunities to recover income lost to inflation; sovereign-debt markets are not as liquid as stock markets are (unless the central bank provides freshly printed cash for that purpose). Furthermore, if the inflation in question is driven by strong monetary expansion, and if that expansion is motivated by deficit monetization, then the reason for weakening confidence in sovereign debt will correlate positively with inflation.
In short: if a government monetizes its deficits to the point where the monetization causes inflation, the government drives people away from its debt both because of debt-default concerns and because of inflation.
Again, the U.S. government is not there yet, but it has opened the path to get there. Only dedicatedly active measures by the Federal Reserve and the Treasury will prevent that from happening.
So far, neither institution has shown an interest in doing so. However, we can report one tiny piece of good news: money supply did not grow in January. Figure 3 explains:
This is the first month in a year and it carries no real weight in terms of policy indicators. However, a trend break is always noteworthy, and in this case it makes us anticipate February numbers with excitement.
It is also worth noting that weekly data still points to a weak upward trend. Together with the coming, new stimulus packages out of Congress, we can reasonably conclude that more than anything else, the January M1 number reflects a pause in our monetary expansion.
This week’s Economic Newsletter will examine the latest debt numbers in detail. We will look at the government debt and project its cost over the next few years. We will also look at debt ownership and how widespread the consequences will be, should the U.S. government reach a point where its debt-honoring capacity is stretched to its limit. Subscribe today and get our unique, comprehensive and scholarly based research every week! For questions regarding subscriptions, contact us at: slarson (at) hush.com.