Wolfe flags fiscal pressures facing Treasury ahead of borrowing outlook release

Investing.com - Long-dated U.S. Treasury yields spiked last week following comments from Federal Reserve Chair Kevin Warsh which sparked concerns that the central bank may be falling behind in its attempt to corral energy-driven inflation pressures.

Warsh suggested that financial conditions had tightened, potentially doing some of the work of quelling price gains for the Fed, although he stressed that there was "nothing inertial" about the central bank's policy discussions.

Still, the statements were met by a so-called "bear steepening" in the yield curve, with 30-year Treasure yields spiking to a nearly two-decade high. Such an event, in which long-term interest rates rise faster than their short-term counterparts, can be a signal that markets are becoming increasingly concerned about inflation.

"Some of this was just the unwinding of the market's hawkish interpretation of Warsh's first meeting" in June, at which he did not provide any concrete guidance for rates, analysts at Wolfe Research said in a note.

"But the higher long end of the yield curve is an unwelcome development both for markets and for the federal fiscal outlook."

They added that higher yields "both reflect and exacerbate" the unsustainability of the U.S. fiscal situation, noting that, with federal debt at 100% of gross domestic product and deficits at over 6%, "there are increasingly important negative feedback loops between high deficits and high interest rates."

"We've long argued that the grim fiscal outlook will not cause a near-term crisis, but that it will be a source of secular upward pressure on the long end of the yield curve, which is now playing out," the analysts said.

This creates a "challenging context" for the release on Wednesday of the Treasury Quarterly Refunding Announcement, a formal statement issued four times a year by the U.S. Treasury Department which details the government's borrowing plans and sizes for notes and bond auctions, the analysts flagged.

They said they were "somewhat skeptical" that the Treasury Department will "even signal an increase in coupon issuance at the long end next year, which would risk exacerbating the recent bear steepening."

Consensus estimates see the Treasury Department holding coupon auction sizes flat in the upcoming QRA, although a debate remains around whether a forecast on future coupon increases will be provided.

You May Also Be Interested In

• Russia opens case against Apple over app requirements
• AMD (AMD) call put ratio 1.3 calls to 1 put into quarter results
• Sanctioned Georgia refinery to complete shift from Russian oil by September