Bond Market Update: Two Auctions Down, the Big One Thursday
Last week I wrote that three Treasury auctions this week would tell us a lot about where the bond market, and by extension the economy, is headed. Two of the three are now in, and I am pleased to report the news is better than I feared.
Tuesday's 3-year note auction was steady: no real signal for better or worse. Today's 10-year note auction was measurably better than expected. Foreign buyers, the ones everyone worried had left the market, took 80 percent of the sale, and the dealers who are required to bid were left holding almost nothing. That is the good news going into Thursday's 30-year bond auction, the most critical of the three. Let's hope for more of the same.
Even if Thursday goes well, and even if the country avoids a crisis this time around, we still have a significant problem.
The most obvious is interest rates, for every business and for the country. The 10-year note cleared at 5.3 percent today, the highest since 2000, and that rate flows into everything. Business loans cost more. Mortgage rates are above 7.5 percent. Credit card finance charges will keep rising. Anything borrowed costs more today than it did last month.
Servicing the national debt has also become substantially more expensive over the past 30 days. That is a burden we all carry, and it is not going to change unless we make Congress change it.
Here is the part that frustrates me as a tax professional. We got our tax cuts, more than expected, and federal revenues for the fiscal year that ended September 30 are on track to be the highest in history. But only by a slim 3 percent or so over last year, while spending grew faster and interest on the debt alone approached a trillion dollars. Record revenue is not fixing this because spending is outrunning it.
The solution, in my view, is simple to state and hard to do: Congress has to live within a budget, and preferably run a surplus to start paying down the debt, even if that means cutting key entitlement programs. It should be whatever it takes, right now.
I will send a short follow-up after Thursday's 30-year auction. In the meantime, if you have not yet talked with your financial planner about the questions in my earlier note, this week's results are a reason for cautious optimism, not a reason to skip the conversation.
Scott C Turner CPA
This note is general information and reflects publicly reported market conditions as of the date above. It is not investment or financial planning advice. Please consult a licensed financial advisor before making investment decisions.
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