{"id":6764,"date":"2023-10-29T15:56:31","date_gmt":"2023-10-29T15:56:31","guid":{"rendered":"https:\/\/infundpros.com\/business\/can-america-afford-two-wars-heres-what-the-bond-market-thinks\/"},"modified":"2023-10-29T15:56:32","modified_gmt":"2023-10-29T15:56:32","slug":"can-america-afford-two-wars-heres-what-the-bond-market-thinks","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=6764","title":{"rendered":"Can America afford two wars? Here\u2019s what the bond market thinks"},"content":{"rendered":"
\n

\n If you want to aggravate the US bond market, just remind traders <\/strong>how high the nation\u2019s budget deficit is.\n <\/p>\n

\n The latest tally from the Treasury Department for the fiscal year that ended September 30 put the deficit at $1.7 trillion.\n <\/p>\n

\n But it\u2019s effectively even higher \u2014 around $2 trillion \u2014 if the impact of President Joe Biden\u2019s federal student debt cancellation plan, which the Supreme Court struck down before it took effect, is not included. That\u2019s twice as high as the deficit the prior fiscal year.\n <\/p>\n

\n Budget deficits happen when a government\u2019s spending exceeds what it collects in taxes. To cover the difference, governments have to borrow money, which usually comes from issuing more bonds. All else being equal, that tends to push bond prices down, which causes yields to go higher.\n <\/p>\n

\n For a while, investors shrugged off the ever-growing US deficit and the impact it has had on the government\u2019s debt obligations, since the understanding has been the Treasury will make interest payments on time.\n <\/p>\n

\n But, increasingly, investors are paying more attention to policies that have the potential to further increase the deficit and the amount of money the government has to borrow. That has led more investors to question how sustainable the debt level is and, as a result, demand higher compensation for holding long-term debt, said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.\n <\/p>\n

\n Treasury Secretary Janet Yellen, however, said she doesn\u2019t think \u201cmuch of\u201d the rise in yields is connected to the US\u00a0budget deficit. \u201cLargely, I think it\u2019s a reflection of the resilience that people are seeing in the US economy,\u201d she said on Thursday at an event hosted by Bloomberg.\n <\/p>\n

\n Meanwhile, lawmakers have yet to sign off on a budget for most of the current fiscal year, but the possibility of having to fund two simultaneous wars, in Israel and Ukraine, would undoubtedly lead to more government spending and a higher deficit.\n <\/p>\n

\n What will that mean for the bond market?\n <\/p>\n

\n Ramping up spending to support Israel and Ukraine doesn\u2019t automatically mean the deficit will grow and cause bond yields to move higher, said Rachel Snyderman, director of economic policy at the Bipartisan Policy Center.\n <\/p>\n

\n The defense spending proposal Biden unveiled last week that allocates $86 billion for Ukraine, Israel and humanitarian aid in Israel and Gaza \u201cwould comprise a significantly small portion of the deficit,\u201d Snyderman told CNN.\n <\/p>\n

\n The Treasury would need to issue more bonds to come up with the $86 billion, she said. But that would represent three-tenths of a percent of the $26.33 trillion of US debt held by the public.\n <\/p>\n

\n \ufeffBy her own calculations, it would increase the deficit in the 2024 fiscal year by just <\/strong>5% from <\/strong>the Congressional Budget Office\u2019s projected deficit level of $1.57 trillion for the current fiscal year.\n <\/p>\n

\n During previous periods of heightened geopolitical tensions such as wars, investors tend to stage a flight to safety, including moving more of their money towards assets like US Treasury bills that are viewed as safe havens.\n <\/p>\n

\n That initially happened when the war broke out in Israel, causing yields to fall. But yields quickly bounced back. For instance, the yield on the 10-year Treasury note is almost touching 5% <\/strong>for the first time since 2007.\n <\/p>\n

\n That suggests there are other factors that may be outweighing the effects of the war that are driving yields higher, said Snyderman.\n <\/p>\n

\n Over the past few months, investors have come to terms with the prospect that interest rates could remain higher for longer than they initially expected when the Federal Reserve began tightening last year.\n <\/p>\n

\n That\u2019s because inflation remains above the Fed\u2019s 2% target, and recent data shows it\u2019s heating up again. To get inflation down more, Fed officials have been signaling that they\u2019ll need to keep rates near current levels until they\u2019re convinced inflation won\u2019t run hotter.\n <\/p>\n

\n In anticipation of the \u201chigher for longer\u201d phenomenon, investors have been selling more US bonds.\n <\/p>\n

\n Since the debt ceiling was suspended in June, the Treasury has been issuing more bonds to fund government spending.\n <\/p>\n

\n Also, since the debt ceiling was suspended in June, the Treasury has been issuing more bonds to fund government spending, pushing bond prices down.\n <\/p>\n

\n The Treasury warned in July it expected to borrow $1 trillion in the third quarter, the most the government has ever borrowed during a third quarter. On top of that, Treasury estimates it will borrow $852 billion in the final quarter of this year. However, that estimate doesn\u2019t take into account the war between Israel and Hamas.\n <\/p>\n

\n Another factor that could be playing a role is Fitch Ratings\u2019 recent downgrade of US debt and Moody\u2019s Investors Service warning that it could revise its assessment of the fundamentals that dictate its credit rating for the United States.\n <\/p>\n

\n Taken together, both are signaling to investors that holding US debt is riskier, said John Lynch, chief investment officer at Comerica Wealth Management.\n <\/p>\n

\n Even if US spending to support Israel doesn\u2019t directly impact bonds, \u201cthe uncertainty that wars inject into the economy\u201d is enough to throw markets off course, said Snyderman. That makes it particularly difficult to predict the future path of bonds, he said.\n <\/p>\n<\/p><\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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