Bond Market Rocks The Richter Scale

The problem, as far as the future direction of interest rates is concerned, is that all three conditions are now heading the other way. The rates of C.P.I. and G.D.P. growth are about to surge on an annual basis in the next few months due to last year’s virus-related base effects. Adding to this upward pressure on rates, the Biden administration could soon sign into law the $1.9 trillion COVID Relief Package. If approved by the Senate, the bill will include $400 in enhanced unemployment checks as well as $1,400 stimulus checks for most families. And, an expansion of the child tax credit to give families up to $3,600 per child. This huge amount of new debt issuance will once again be all monetized by the Fed.

Adding further fuel to the surging growth and inflation dynamic is the continued roll-out of the vaccines, along with the warmer spring weather, which should serve to steepen the downward trend in Wuhan-related hospitalizations and deaths that is already in place. This will lead to a reopening of the economy and cause a surge in Leisure and Hospitality sector hiring.

These factors should also cause Wall Street’s bond vigilantes to become dreadfully afraid of the inevitable tapering of Jerome Powell’s asset purchase program. After all, the Fed is comprised mostly of Phillips Curve devotees; and the surging Non-farm Payroll reports coming in the late spring and early summer should awaken them from their slumber. The end of central bank rate manipulation should cause the average interest rate on debt service payments to spike higher. If the Fed were to be forced to abruptly end Q.E. and raise rates, that spike could--at least temporarily--rise towards that average rate of 7% seen in 2001.

Just how damaging could that be for this overleveraged economy? Our national debt now stands at $28 trillion, and last year’s annual deficit was a daunting $3.1 trillion. But now, President Biden’s $1.9 trillion COVID Relief package is just the start of 2021 spending plans. D.C. will then quickly turn to another multi-trillion-dollar infrastructure deal before the ink on this latest round of stimulus checks is dry. Alas, the C.B.O. already predicts the deficit for fiscal 2021 to be $2.3 trillion. Sadly, this is before, and such new government “stimulus” plans become law. It is inconceivable that the market for our government debt could function normally if our annual deficit climbs towards 35-40% of G.D.P. This will be especially true if the Fed is forced to fight inflation instead of continuing to supply its massive and price-insensitive bid for Treasuries.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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