US Deficit Steepener Yield Pressure
The lack of a sustainable deficit control plan in the U.S. will contribute to a steepener bias within the Treasury curve.
Too little corroboration in the last 3 days to call a trend (5 articles). Watching for it to gain traction.
Sources express skepticism that the administration can implement material deficit reduction measures, particularly given the political difficulty of overhauling entitlement programs, which will keep long-end yields pressured and support a steepening curve structure.
Uncontrolled fiscal deficits create persistent long-duration supply and inflation expectations that push long-end yields higher relative to short-end rates; this structural dynamic favors curve steepening and affects the relative attractiveness of duration strategies.
"We are skeptical the administration can realistically do anything at this point on the deficit that would be material. Overhauling those entitlement programs is 'a non-starter in the near term,' and even more so after November if Democrats win at least one chamber of Congress."
"To buy these bonds, the Treasury will use US dollars, but where will it get those dollars, given the government is running on deficit spending? In a word, it's going to print them; and in other words, quantitative easing... printing more dollars makes the dollars in circulation and those the Treasury will pay back to bondholders less valuable."
"Forward guidance in general has served to suppress volatility and anchor market expectations, and that has led to lower borrowing rates, relative to alternatives. Still, the impact on consumers is likely to be modest, Pearkes added, with mortgage rates perhaps a quarter-point higher than they would be otherwise."
"Issuing short-term securities initially seemed prudent, but the flattening yield curve and potential Federal Reserve rate hikes expose this strategy's vulnerabilities."
""We still don't have a sustainable and credible plan for deficit control here in the U.S., so that should show up fundamentally as a steepener bias within the Treasury curve," Khanduja said."