Kelly Evans
One of the biggest breakouts this week on the GOP's election win has been the sharp increase in long-term Treasury yields. A Republican Congress will give the green light for Trump's deficit-boosting (and possibly inflationary) policies, the thinking goes. The 30-year bond jumped almost 20 basis points Tuesday night, as the sweeping victory became clear.
But not everyone is convinced the fiscal situation will worsen in the years ahead. Dan Clifton of Strategas explained on our air yesterday why he thinks it will actually get better.
Part of his case has to do, ironically, with the debt ceiling that we are going to hit on January 2nd. That's when the current "suspension" expires. And Clifton thinks that in order to keep paying its bills past that date, the government will start to run down its $850 billion Treasury General Account.
Prior to Covid, this was a relatively mundane housekeeping account that carried only around $350 billion. After the pandemic hit, it exploded to nearly $2 trillion in size, as Treasury issued tons of debt to raise money that was expected to be needed for Covid stimulus.
By the time the last debt ceiling agreement was reached, after a six-month battle that ended last summer, the account was nearly zeroed out. It has since been built back up again to its present size. Point being, Clifton thinks drawing down that account again is somewhat equivalent to a stimulus event for the economy.
"When we do that, money from outside the banking sector comes into the banking sector," Clifton told us. "What that does is it loosens financial conditions, so bond yields come down, the dollar comes down, and that's going to be so much bigger than anything Donald Trump can do on inflation or deficits."
This "liquidity bazooka" is also why he thinks hitting the debt ceiling this time around could actually be positive for stocks and other risk assets.
And beyond that one-off event, what about the $2 trillion budget deficit and the high debt loads we are running? There, too, we could see some gradual signs of improvement.
"The Congressional Budget Office is assuming the deficit is going up," Clifton said. "We think it's coming down by $300 billion, no matter who gets elected," and if Trump does less student loan forgiveness than Biden, it could come down by even more than that, he said. January could even see CBO revising its forecasts in that direction.
As for the impact of extending the Trump tax cuts, which are due to expire at the end of next year, and equate to a $400 billion "fiscal cliff" for consumers, Clifton says the House Budget Committee has been working for months on "pay-for's" that could help offset their budgetary hit.
And while much of this might sound pie-in-the-sky or rather implausible, markets can be extremely sensitive to small shifts like these, which can "bend the curve" in a favorable direction. The 10-year Treasury yield, for instance, has calmed down to 4.37% this morning. The 30-year is almost back below 4.5%.
As for inflation, the first Trump presidency resulted in the Fed cutting rates by the third year of that term, tariffs notwithstanding. So until or unless the president comes out with a much more costly-sounding agenda, the "bond vigilantes" may actually take a breather here.
See you at 1 p.m!
Kelly
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