The One Number That Will Determine the Fate of the Markets and Economy
This is the only one that really matters right now.
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The financial press, after years of largely ignoring the yawning fiscal deficit and massive federal debt, has suddenly rediscovered these existential issues and become intently focused on this topic. My regular readers know this is something I have railed against consistently throughout my over a decade as a TheStreet Pro columnist.
This situation has grown much more dire since government spending blew out during Covid and the years after the pandemic. After watching the federal debt balloon under various administrations from around $6 trillion at the turn of the century to over $36 trillion now, I think it safe to say neither party has the desire or fortitude to cut government spending enough to bring the fiscal deficit back down to a sustainable rate of two to three percent of GDP.
All of this has become much more problematic as, after 15 years of the Federal Reserve keeping interest rates abnormally low, yields on sovereign debt have shot up in recent years. Servicing costs on the federal debt have risen to over $1 trillion annually, and are now the second largest line item in the federal budget. Meanwhile, for the first time in generations, Moody’s just became the last of the major credit rating agencies to downgrade U.S. debt from its top rating.
If misery truly does enjoy company, the U.S. is in better shape than either Japan or China. Both Asian nations have higher debt-to-GDP ratios, if one includes China’s regional governmental debt. Both countries also have worse demographic situations and import most of their energy needs. Yields on Japanese long-term debt have recently spiked up to all-time highs. 10-year yields on U.K. sovereign debt have also risen to their highest levels since the late 1990s.
Of course, being in the same boat as other nations is hardly a comforting thought. In my Wednesday column, I presented a quite pessimistic outlook for the housing sector, which is a key economic growth engine. On Thursday, April existing home sales printed their lowest pace for the month of April since 2009, right in the heart of spring selling season. Inventory levels also increased 9% from March. This comes after existing home sales in both 2023 and 2024, posted their lowest annual levels since 1995.
Rising rates will continue to negatively hit the already struggling commercial real estate sector where delinquency rates have been rising now for more than a year. Trillions of dollars of CRE loans need to be refinanced over the next few years at much higher rates as it is. In addition, rising rates will boost the unrealized losses on banks’ bond portfolios. This was one the key drivers that caused three major regional banks to be shuttered in the first half of 2023, most notably Silicon Valley Bank.
Given the implications of rising rates, the one number that I am keeping a daily eye on is the yield on 10-Year Treasuries. If, once the FY 2026 federal budget passes, yields start trending back down towards the 4% level, equities and the economy should muddle through.
However, if this yield continues to move up to the 5% level, expect more cries from the financial press about a "debt crisis" they should have been sounding the alarm on a decade ago. In this scenario, volatility will spike, and stocks could have another hiccup like what followed ‘Liberation Day’ in early April.
At the time of publication, Jensen had no positions in any securities mentioned.
