- T-note market feels the weight of Washington’s massive debt burden
- Another 3 million people likely filed for unemployment benefits last week
T-note market feels the weight of Washington’s massive debt burden — June 10-year T-note prices on Wednesday dropped to a 3-week low and closed -10 ticks. Meanwhile, the 10-year T-note yield jumped to a 3-week high of 0.741% and closed the day +4.1 bp at 0.703%. However, even though the 10-year T-note yield rose to a 3-week high yesterday, it remained within the very narrow 24 bp range of 0.54%/0.78% seen over the past six weeks.
The T-note market on Wednesday was surprised when the Treasury announced much bigger than expected 10-year, and 20-year, and 30-year auctions for the next two weeks. The Treasury is clearly trying to extend the maturity of its debt to take advantage of extraordinarily low long-term yields.
The Treasury market should nevertheless be able to easily absorb the massive incoming supply because of the plethora of bullish factors that include: (1) the Fed is likely to continue its QE program of buying Treasury and MBS securities for at least the next year or two, (2) there is no risk of inflation over the near-term with the current 10-year breakeven inflation expectations rate of 1.10% being far below the Fed’s +2.0% inflation target, (3) the Fed is expected to leave its funds rate target unchanged near zero for at least the next two years, and (4) there is strong safe-haven demand for Treasury securities with the worst pandemic in 100 years causing economic devastation around the globe and extending the risks for a systemic financial crisis.
There is also strong demand for Treasury securities from many foreign investors who face negative interest rates at home and who see a 0.70% yield on a risk-free Treasury 10-year T-note as being attractive. There are currently $11.1 trillion of overseas debt securities that carry negative yields. The only reason there isn’t a larger amount of negative-yielding securities is that global corporate bond yields have risen in recent weeks due to the increased corporate credit risks caused by the pandemic.
While the environment is currently very favorable for the Treasury to unload its massive debt load, the situation will become less favorable as the U.S. economy moves past the pandemic in the coming years. Indeed, the picture could turn downright ugly down the road if the U.S. does nothing to curb its national debt, which is soon expected to be above 100% of GDP. The U.S. will really be in trouble if inflation ever breaks out, and interest rates rise sharply, which would cause interest costs to soar and potentially cause a U.S. sovereign debt crisis.
The Treasury on Wednesday announced that next week’s quarterly refunding operation will total a record $96 billion, up by $12 billion from the last refunding operation in February, which totaled $84 billion and consisted of $38 billion of 3-year T-notes, $27 billion of 10-year T-notes, and $19 billion of 30-year T-bonds.
The Treasury said it will auction $42 billion of 3-year T-notes next week, right on the consensus. However, the Treasury announced a 10-year auction size of $32 billion, which was $3 billion higher than the consensus of $29 billion. The 30-year T-bond size of $22 billion was $1 billion higher than the consensus of $21 billion. Also, the Treasury announced that it will sell $20 billion of 20-year T-bonds on May 20, $5 billion above the consensus of $15 billion.
The Treasury on Monday said that it will have to sell a net $3 trillion worth of Treasury securities just in Q2 in order to cover the massive budget deficit. The Treasury said it expects to sell another $677 billion of net new debt in Q3.
The expected $3 trillion surge in the national debt in Q2 would push the national debt from the current level of $25 trillion up to a new record high of $28 trillion by the end of September. The new debt level would be up by about $8 trillion (+40%) since President Trump took office due to the combination of long-term chronic overspending, the 2018 tax cuts, and now the pandemic debacle.
Another 3 million people likely filed for unemployment benefits last week — The consensus is that another 3.0 million people filed for unemployment benefits in the week ended last Friday. That would be the lowest figure in six weeks, but would nevertheless mean that businesses are still laying off people on a massive scale.
A total of 30.6 million people have already filed for unemployment claims since mid-March. That represents 19.3% of the 158.8 million people that were employed in February, according to the Labor Department’s household survey. That suggests that the unemployment rate is headed toward a post-war record high of 20% or higher by May.
Moreover, the U.S. labor market situation is much worse than the unemployment claims statistics suggest because not everyone who lost their jobs in recent weeks was able to file for unemployment benefits. For example, self-employed people in the past have not been able to file for unemployment benefits. Even though self-employed persons are now allowed to file for the first time, the application process for them has reportedly been slow and rocky. There are also millions of people involved in the unreported economy who may have lost their jobs and income but can’t file for unemployment claims because they were being paid cash instead of W2 wages.
The consensus is for Friday’s April unemployment report to show a -21.25 million plunge in payroll jobs, which would put the job level near the bottom of the Great Recession The April employment rate is expected to surge to 16.0%, which would easily take out the post-war record of 10.8% posted in 1982 but remain below the Depression’s record of 24.9%.
