February 10, 2025
The bond market may be starting to worry.
Last year was a good one for stocks. The Nasdaq Composite Index gained 28%, the S&P 500 gained 23%, and the Dow Jones Industrial Average rose almost 13%.
But if you look closer, both the 30-year and the 10-year Treasury yields rose about 18% too. Last year was when the Federal Reserve was cutting short-term interest rates. And though the yield curve was normalizing, it feels a little different this time.
We’re beginning to see the signs of a bond market concerned about the $2 trillion deficit and a $36 trillion national debt that’s on its way to $60 trillion unless something changes quickly. At the current rate, total U.S. debt will be over $50 trillion by the end of the decade. Interest on this debt will be the largest line item in our budget – larger than Social Security, Medicare, and defense.
Federal debt interest will be approaching the level of income taxes we pay. When you add state and local debt to the mix, the government debt-to-gross-domestic-product ratio is not just 122%, but 133%.
It’s not surprising that bond buyers want more for taking such risk. How long do you think they’ll be satisfied with 4.5%?
And even if the Fed cuts two or three times this year, it probably won’t have much of an effect on long-term rates unless there’s an accompanying recession. Still, the cuts would only be temporary because rates would soon return to higher levels.
This may be a return to normal, but I think it could also be the start of a trend towards higher rates because of debt concerns. It shouldn’t overwhelm anything soon, and if we can control the deficit, rates could decrease.
However, I fear it’ll take a crisis to control the debt.