The
Big Beautiful Bond Meltdown
By the Curmudgeon with Victor
Sperandeo
U.S. Bond Market Week in Review:
U.S. Treasury yields climbed across the curve after Fridays
stronger-than-expected BLS jobs report prompted traders to scale back bets on
Federal Reserve rate cuts and lower the demand for U.S. notes and bonds.
The BLS reported that non-farm payrolls added 139,000 jobs in
May after 95,000 aggregate downward revisions.
The unemployment rate held steady at 4.2%, while average hourly earnings
accelerateda combination that eased concerns of a sudden labor-market downturn
even as tariffs and slower growth weighed on hiring. The labor markets
steadiness may give the Fed more flexibility to keep rates on hold and avoid
premature easing, reducing the risk of reigniting inflation. Thats despite President Donald Trump
badgering Fed Chairman Jerome Powell to cut rates by a full percentage point
ASAP!
On Friday, June 6th, the 10-year Treasury yield jumped 12 basis points to close at 4.51%,
while the 30-year yield closed at
4.97% -- not too far from the 5% danger level many analysts fear.
U.S.
Treasury Yields (as of June 6, 2025):
Maturity Yield (June 6, 2025) Previous Market Day
2-Year Note 4.04% 3.92%
5-Year Note 4.13% 3.99%
10-Year Note 4.51% 4.39%
30-Year Bond 4.97% 4.88%
.
.
Our benchmark U.S. bond indicator- TLT (the iShares 20+ Year Treasury Bond ETF) - closed at $85.35
or -1.27% on Friday. Thats just a few ticks above its June 3rd
closing low of $85.01.
Whats so disappointing to bond fund investors (like the
Curmudgeon, who owns IEF the 7 to 10-year U.S. Note ETF) is that TLT looked
like it had made a solid bottom on June 3rd. On June 4th TLT popped + 1.62% to
close at 86.39 on very heavy volume of 57,441,500 shares. It inched up the next
day to close at $86.45.
Stocks Rise Despite Ever Higher Bond Yields:
Stocks continued to rally this week with the S&P 500
closing slightly above the psychologically important 6,000 level for the first
time since February. The historical fact
that higher rates are bearish for equities seems to have been forgotten by the
stock market participants.
For the time being, there seems to be a collective
disinterest in equities revisiting the stock-bearish implications from higher
yields, unless and until the local (interest rate) range is breached to the
upsidehence our habituation argument, wrote Ian Lygen,
head of interest rates strategy at BMO Capital Markets, in a note to
clients.
The Big Bad Bear Market
in U.S. Bonds:
Having started ~ mid-August 2020, the current bond bear
market in the U.S. has been ongoing for approximately five years. Thats by far
the longest bond bear market in U.S. history as per this chart courtesy of
Charlie Bilello [1.]:
Note 1. The duration of the
current bond bear market is now 58 to 59 months old. The chart above is dated June 30, 2024 and it was 47 months at that time.
.
.
Investors, like the Curmudgeon, who
own bonds or bond funds (ETFs, mutual funds, closed end funds, etc.) have
experienced significant losses as bond prices have fallen. For example, TLTs
market price on August 4, 2020, was $171.57 vs $85.35 at Fridays close.
Thats a loss (not including dividends paid) of
-50.52%! If you take TLTs 8/4/20
adjusted close (which includes dividends) of $149.76, the total return loss is
-43%.
What makes it so much worse for fixed income investors, is
that stocks have rallied super strongly since the bond bear market started on
August 4, 2020. The S&P 500 closed at 3306.51 that day. Not including
dividends, the S&P as of Fridays close of 6,000.36 is up +81.47% since
then.
-->Has there ever, in all of history, been such a huge
divergence between the total return of U.S. stocks vs bonds? Its beyond boggling!
.
Fiscal Mess in Washington is Destroying the U.S. Bond Market:
U.S. bond markets faced renewed pressure in May-June 2025 due
to ongoing fiscal concerns which we identified in Curmudgeon/Sperandeo posts here and here. U.S. fixed income markets are currently
facing pressure from the substantial federal government debt, which stands at
$36 trillion, and rising budget deficits. This led to Moody's downgrading the U.S.
credit rating from Aaa to Aa1 in late May 2025. The
massive supply of new debt, coupled with potentially weakening demand from
traditional buyers (like the Fed and foreign central banks) could keep yields
elevated.
Some analysts suggest the U.S. faces a "runaway bond
market" where the issuance of new debt with higher yields necessitates
issuing even more debt to service existing obligations. This creates a damaging
fiscal feedback loop that could sustain upward pressure on yields.
In a June 7th FT
op-ed "U.S. fiscal policy is going off the rails and nobody seems to
want to fix it," Harvard Professor Kenneth Rogoff wrote:
The 2024 budget deficit
was a mind-blowing 6.4% of GDP; credible forecasts suggest that the deficit
will exceed 7% of GDP for the rest of President Trumps term. And that is
assuming there is no black swan event that once again causes growth to crater
and debt to balloon. With US debt already exceeding 120% of GDP, it seems a
budget crisis of some sort is more likely than not over the next five years....
Long-term real interest
rates today are far higher than they were in the 2010s. Between 2012 and 2021,
the inflation-indexed 10-year US Treasury bond yield averaged around zero.
Today, it is over 2 per cent and, going forward, interest payments are likely
to be an ever-larger force pushing up the US debt-to-GDP ratio. Real interest
rises are far more painful today than they were two decades ago, when US debt
to GDP was half what it is now.
Trumps tariff wars,
threats to tax foreign investment and efforts to undermine the rule of law will
only accelerate the process. Indeed, if he succeeds in achieving his dream of closing up the US current account deficit, the reduced
inflow of foreign capital will push US interest rates up further, and
growth will also suffer.
The U.S.s high debt and
inflexible political equilibrium will be a major amplifier of the next crisis,
and, in most scenarios, the American economy and the dollars global status
will be the losers.
Grave Danger in the Big Beautiful Budget Bill (aka Bloated
Budget Boondoggle):
The Big Beautiful Budget Bill, currently being
considered by the U.S. Senate, is projected to add $2.4 trillion (excluding
interest costs) to the budget deficit over the next 10 years, according to the Congressional
Budget Office (CBO). When interest
costs are included, the total debt increase would be around $3.0 trillion.
Additionally, the bill is expected to increase the national
debt by $3.0 trillion, including interest expense. Some estimates suggest that
if temporary provisions in the bill are extended without offsets, the debt
could increase by $5.0 trillion.
As for spending increases, the bill allocates an
additional $150 billion for defense spending, with a focus on pilot-less
aircraft like drones. It includes a $25 billion "down payment" for
the "Golden Dome" missile defense system (a re-incarnation of Ronald
Reagans Strategic Defense Initiative aka Star Wars).
This matches the amount requested by the Trump administration and is a
significant part of the overall defense spending increase in the bill. As weve
noted in previous posts, debt service costs are now greater than U.S. defense
spending.
The bill also allocates $70 billion for border security,
including funds for border barrier construction, CBP (Custom and Border
Protection) facilities, and personnel.
The bill is designed to front-load
costs (tax cuts and spending increases) and delay savings, creating a structure
where the initial impact on the deficit is substantial, according to the Committee
for a Responsible Federal Budget.
Like this cartoon
When Will Social Security and Medicare Go Bust?
Based on current debt projections, the U.S. may not be
able to fund Social Security in 2033 or Medicare in 2035 (Source: Perplexity
AI agent)!
l The Social Security Old-Age and Survivors Insurance
(OASI) Trust Fund is projected to be depleted by 2033. When this happens, the
program will only be able to pay out benefits using current payroll tax
revenues, which are estimated to cover about 8083% of scheduled benefits. This
means that, absent legislative changes, Social Security checks could be reduced
by about 1721% starting in 2033.
l The Medicare Hospital Insurance (HI) Trust Fund (Part
A) is currently projected to remain solvent until 2036. Like Social Security, Medicare is a mandatory
program. If the HI trust fund were to be depleted (as projected for 2036), the
program would only be able to cover a portion of scheduled benefits from
current revenuesabout 89% for Medicare Part A
according to recent estimates.
Victors Comments:
Elon Musk was 100% correct when he said the big beautiful bill is a "DISGUSTING
ABOMINATION." While it might be
bullish for stocks (increased government spending eventually ends up boosting
corporate profits), it's DEATH for U.S. deficits and the debt!
Rising debt and interest payments will place a severe strain
on the U.S. economy, potentially leading to higher interest rates for
individuals and businesses, reduced economic growth, and potentially crowding
out private borrowing.
Worse, it significantly increases the risk of a U.S. debt
default in the future due to its negative impact on the national debt and the
country's fiscal situation. See my
Conclusions below for an alternative ending.
Victor: Did Thrasymachus Accurately Describe Todays U.S.
Leaders?
Thrasymachus,
a sophist of ancient Greece, was known for his cynical definition of justice.
He argued that justice is essentially "the advantage of the stronger"
or "what is in the interest of the rulers." He contends that rulers
who make the laws, define justice to serve their own
interests, and those who follow these laws are considered just.
He also asserted that injustice is better than justice, because
it allows for greater personal gain. Thrasymachus believed that people who are
given the power to do injustice would do so as long
and they would not have to deal with or face the punishment of such injustice.
Men in power will abuse it if they can do so without having to face any moral
or legal punishment for doing so.
Victors Conclusions:
Sometime soon, U.S. debt will reach a tipping point where
there are no longer sufficient buyers at Treasury auctions which will then
fail. That would make U.S. debt default
a real possibility. To prevent that outcome, I believe the U.S. will resort to hyper-inflation
(keystroke entries or printing more money) to create enough dollars to cover
debt service costs, repayments and deficit spending.
If this bill becomes law, the nation as we know it is toast
-if not now when? History shows the type
of fiscal irresponsibility now being shown by the GOP always turns into a
dictatorship! As a result, this big,
beautiful bill" is ACTUALLY a vote to end
liberty. That is the subtle fact!
.
..
Success, good luck and good health. Till next time
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
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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