The current back up in bond yields has a lot to do with a little-observed announcement by the U.S. Treasury that the Federal government is on pace to borrow $1 trillion in this coming fiscal year. To provide some context for this estimate, at the height of the 2008 financial crisis the Obama Administration borrowed $ 1.8 trillion, of which some $800 billion was earmarked directly to counter a steep shortfall in output and employment as the economy plunged into a sharp recession. This specific amount was a direct injection of Federal government spending, mainly for tax cuts and infrastructure spending. Since 2009, borrowings have come down steadily, falling to just $500 billion in 2017.

By contrast, the Tax Cuts and Jobs Act enacted this year is all about revenues foregone due to corporate tax cuts. The Treasury’s announcement revealed that 2018 borrowings will be nearly double what the government borrowed in 2017. Under the tax reform bill, the tax cuts are projected to reduce revenues by $1.5 trillion over the next decade, in addition, to the structural deficits already inherent in the tax system. The CBO expects tax receipts to be lower by $10 billion to $15 billion per month in this quarter alone.

Furthermore, the Treasury department linked the larger debt sales to the Fed’s unwinding of QE. As the Fed reduces the amount of debt it will re-invest, the Treasury must make up the difference by issuing more bonds. The Fed currently is allowing up to $12 billion of the debt to roll off per month. The caps are gradually increased through time to a maximum of $30 billion by October 2018. Thus, the reduction in the Fed’s purchases must be made up by Treasury.

This past year Treasury auctions have met with considerable success. Bids for 10-year and 30-year bonds have been strong at all points along the yield curve. The category of “indirect “investors, comprising foreign central banks and large overseas funds have been the most active in swooping up Treasuries. This trend could well continue, yet with additional supply coming on stream, it may likely require higher bond yields to support continued strong demand.

As Harvard economist Martin Feldstein, a former Reagan adviser put it bluntly, “these deficits and the debt that keeps rising is a serious problem, not only in the long run but right now”. Time will tell whether rising U.S. deficits really matter, but the more the bond market is taking note.