Bond Vigilantes Return: 30-Year Hits 5% on Fiscal Panic

By the Curmudgeon with Victor Sperandeo

Introduction:

The 30-year U.S. Treasury bond yield topped 5% on Wednesday largely due to an unexpected weak auction for the 20-year U.S. bond. The 30-year U.S. yield hit 5.15% intraday on Thursday and closed the week at 5.03%. The last time the 30-year Treasury yield closed at or above 5% was on October 31, 2023. Here’s a 5-year chart courtesy of CNBC:

Chart courtesy of Yahoo Finance

Term Premium Drives U.S. Yields Higher:

As we noted in a recent Curmudgeon/Sperandeo blog post, the Treasury market yield melt-up is mostly due to the increase in term premium. That reflects the inherent U.S. government policy risks and uncertainty embedded in nominal bond yields.

The Treasury market term premium has spiked +60 basis points since early April to the highest level in eleven years. It is now over +100 basis points above the average of the past decade. Only fifteen other times, dating back to the early 1960s, has the term premium surged this much over a one-year time frame. Those incidents coincided with economic recessions more than half the time.

In a note to clients on Monday, David Rosenberg wrote:

“At first, the surge in yields reflected all the uncertainty surrounding trade and tariff policy, but that took a bit of a respite in mid-May when the President offered olive branches with respect to the reprieves on the reciprocal tariff file. What then replaced that uncertainty was the fiscal risk premium embedded in the Treasury market as investors sense that the White House and Congress are bent on taking what already was an unsustainable budget path into a completely different orbit.”

Update on the “Big Beautiful Bill”:

President Trump’s “Big Beautiful Bill,” which we’ve bashed in our last Curmudgeon/Sperandeo blog post, is the major driver behind the increase in the U.S. term premium.

This egregious bill, which passed the House of Representatives early Thursday by a single vote, would add $2.5 trillion to primary deficits over the coming decade plus $3.1 trillion to U.S. stated debt including interest. If its temporary provisions are extended without offsets, the Committee for a Responsible Federal Budget estimates it would add $5.1 trillion to the debt including interest extended permanently, The bill's spending and tax cuts are front-loaded, while the offsets are back-loaded, leading to a significant increase in near-term deficits.

The Congressional Budget Office (CBO) projects a 10-year budget deficit of $21.8 trillion. The deficit increases by 36% over the budget window, growing from $1.9 trillion this year to $2.5 trillion (5.8% of GDP) in 2032. Spending is expected to total $89.3 trillion over ten years.

With a 53-47 majority in the Senate, Republicans are unlikely to pass the bill if it loses the support of more than three GOP senators. Yet Republican Senators Ron Johnson of Wisconsin and Rand Paul of Kentucky have sharply criticized the bill.

In an interview with CNN's Jake Tapper on State of the Union on Sunday morning, Johnson described the Trump-backed budget bill as "immoral," raising alarms about government spending. "We've witnessed an unprecedented level of increase spending," he warned.

Paul, speaking to Fox News Sunday host Shannon Bream, shared a similar perspective. "If you increase the debt ceiling $4 to $5 trillion, that means they're planning on $2 trillion this year and more than $2 trillion next year. That's just not conservative," the Kentucky Senator said. "Somebody has to stand up and yell, 'The emperor has no clothes,’ Paul said. "Everybody is falling in lockstep on this—'Pass the big, beautiful bill. Don't question anything.' Well, conservatives do need to stand up and have their voices heard," he added.

Indeed, out of control U.S. government spending and ever increasing budget deficits were the main reasons for the loss of the country’s AAA rating by Moody’s last week.

U.S. Economic and Fiscal Policy Uncertainty Indexes at All-time Highs:

The U.S, Economic Policy Uncertainty Index from the St. Louis Fed (FRED) is a measure of uncertainty related to economic policy decisions. It's a daily index, not seasonally adjusted which is derived using results from the Access World News database of over 2,000 U.S. newspapers. The index aims to capture the overall level of uncertainty surrounding future economic policy decisions, including those related to fiscal policy (tax and spending) and monetary policy. A higher index value generally suggests a greater level of uncertainty.

U.S. Treasury vs MSFT Yields:

B of A Global Research notes that “U.S. Treasury yields are now higher than Microsoft bond yields out three years; the 30-year U.S. Treasury/MSFT yield spread is now 20bps - the tightest ever.”

That’s depicted in this chart:

B of A notes that “>5% bond yields are negative for today's highly "financialized" U.S. economy relative to the Rest-of-World. Bond vigilantes are incentivized to punish unambiguously unsustainable path of U.S. debt and deficits.”

Conclusions:

Budget deficit spending, combined with tariff induced price hikes will increase inflationary pressure, which could lead the Federal Reserve to keep interest rates higher for longer. Investors are demanding higher Treasury yields to compensate. The higher interest costs of U.S. debt financing results in even more borrowing, and still higher rates.

The GOP House and Senate representatives remain oblivious to all that. They seem unwilling to make big enough spending cuts or tax increases to control the U.S. budget deficit and ever-increasing national debt.

Victor says the U.S. congressional budget process is killing the U.S. bond market and could end the U.S. as a Constitutional Republic within the next 10 years. Congressional representatives forecast $65 trillion in U.S. national debt (from $36.2 trillion today) in 10 years assuming no recessions over that time span. Victor’s forecast is higher and both he and the Curmudgeon anticipate one or more serious recessions in the next 10 years.

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Wishing all readers good health, success, and good luck. Till next time………………………………………

The Curmudgeon
ajwdct@gmail.com

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Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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