More deficits = more US bonds = higher interest rates

Usually when the US gives information on its plans for bond sales, it’s pretty mundane stuff. But now that we’re in the aftermath of the GOP’s Tax Scam, it gives some interesting insight into where the US budget stands.

For example, we found out today that the US Treasury is going to increase the amount of bonds it’s going to sell in order to pay for the Trump/GOP Tax Scam.

In its quarterly refunding announcement on Wednesday, the Treasury boosted the auction sizes of coupon-bearing and floating-rate debt [to $78 billion] from $73 billion the previous quarter. It was the third consecutive quarterly increase, as President Donald Trump’s fiscal policies widen the nation’s budget deficit.

The Treasury will sell $34 billion in three-year notes on Aug. 7, compared with $33 billion it sold last month and $31 billion in May. The government increased to $26 billion the sale of 10-year notes to be auctioned on Aug. 8, from $25 billion last quarter, and the 30-year bonds to be sold on Aug. 9 to $18 billion from $17 billion in May, Treasury said. The sales will raise new cash of $39.8 billion….

The Treasury also said in the statement it plans to boost auction sizes of all other maturities over the coming quarter. Treasury will boost the size of its two-, three- and five-year notes by $1 billion per month over the quarter, while increasing the floating two-year auction by $1 billion in August. The department will raise the size of its seven-, 10- and 30-year notes by $1 billion in August, holding auction sizes at that level through October. The changes will result in an additional $30 billion of new issuance.

As the bond teeter-totter reminds us, the surplus of those notes and bonds will likely require increased interest rates to sell that debt, in order for the Treasury to have the dollars they need to pay their (deficit-funded) bills.



Partly with that in mind, the yield on the benchmark 10-year Treasury note hit 3% today for the first time in 7 weeks. And it didn’t seem too affected by today’s Federal Reserve decision to hold off on any short-term interest rate hikes until their next meeting in September.

In the meantime, we will see all of this new US debt go on the open market, and that isn’t going to be a one-time thing. As Bloomberg noted, the ballooning budget deficits that Trump and the GOP have voted for are going to require more and more notes and bonds to flood the market in the coming months.

The Treasury’s borrowing needs in the second half of the year will be the most since the financial crisis a decade ago, with the Treasury expecting to issue $769 billion in net marketable debt, the department said Monday. That compares with $1.1 trillion in July-December 2008, when America was in the midst of its worst recession in generations.

Tax cuts, higher government spending and an aging population are expected to push the federal budget shortfall to $804 billion in the current fiscal year, with the deficit exceeding $1 trillion in 2020, according to the Congressional Budget Office. The deficit totaled $607 billion in the first nine months of the 2018 fiscal year that ends Sept. 30, compared with $523 billion from the same period a year earlier.

Even before these extra bonds hit the market and are bid on, we may be starting to see some effects on the US economy from the higher interest rates that are already in place. (Today) we saw more evidence that the US housing market may be declining from the mini-boom we’ve seen in recent years.

Total mortgage application volume slipped 2.5 percent from the previous week and 12 percent from a year ago, according to the Mortgage Bankers Association's seasonally adjusted report.

While homebuyers are less sensitive to weekly rate moves, mortgage applications to buy a home fell for the third straight week to the lowest level in a month. Application volume for homebuyers was down 3 percent for the week and just 1 percent higher than a year ago. Home sales have been weakening for months as high prices hit affordability and low inventory limits choices.

"Application activity remained slow, which is in line with weak trends in other housing indicators such as home sales and housing starts," said Joel Kan, MBA vice president of economic and industry forecasting.

Mortgage applications to refinance a home loan, which are highly sensitive to interest rate moves, fell 2 percent for the week and were nearly 29 percent lower than a year ago, when rates were nearly three-quarters of a percentage point lower.

This is where I remind you that new residential home construction has detracted from US GDP in 4 of the last 5 quarters. That lack of construction may have some responsibility in driving up prices in recent years, but now the higher prices along with the higher interest rates seem to be driving down demand (although your market may vary). When do prices fall with that drop in demand?

The recent upward revisions to the US savings rate keep me from thinking a crash or recession is imminent. But as I‘ve mentioned before, the combination of higher interest rates with a strong dollar makes me think the current direction of businesses and consumers isn't going to sustain in the near future. When that adjustment in economic habits hits, it could put an end to the growth in manufacturing and similar sectors that we’ve been seeing.

Put that together with the prospect of even higher tariffs being put on to Chinese imports, and this economy seems like it’s going to have to choose between inflation and an interest-rate influenced slowdown pretty soon.