By: Editorial Team, StoneX Media
Sovereign yields have climbed across the United States, Europe and Japan, and the driver looks less like inflation expectations than a repricing of fiscal risk. Bond market fiscal discipline works through financing cost rather than refusal to lend, so investors keep funding deficits while steadily raising the price of doing so. U.S. total federal debt has passed $40 trillion, up from $20 trillion a decade ago, and the interest bill on that stock is now large enough to compress the rest of the budget. That puts the next two election cycles in play as a fiscal story, not only a political one.
Michael Lytle is Chief Investment Officer at StoneX Wealth, where he leads the portfolio management process across managed portfolios of mutual funds and ETFs and individual portfolios of stocks and bonds. He earned the CFA charter in 2002 and began his career managing fixed income portfolios at a regional bank, and he now tracks inflation data and broad asset allocation across equities and fixed income.
"I want to come back as the bond market because you can intimidate everybody" is the James Carville line Lytle reaches for, and he reaches for it because the same mechanism is running again. Bond investors did not stop lending to the United States then; they repriced it, and the phrase Lytle uses for their position is "we'll finance you, but it's going to cost you". That pressure contributed to a stretch of balanced budgets and surplus before the pattern reverted to persistent deficits over the following two decades. The practical point for holders of sovereign debt is that discipline shows up as a higher required yield long before it shows up as a policy change.
The cost of carrying U.S. federal debt has become large enough to compete with everything else the government funds, which is the moment fiscal arithmetic stops being abstract. Lytle puts total federal debt at or beyond $40 trillion against $20 trillion 10 years earlier, a pace he notes some may consider unsustainable. "It's beginning to get real for the U.S. budget, which is now seeing the cost of servicing debt go up pretty dramatically, starting to crowd out other spending", according to Lytle. The open question is if that arithmetic reaches the political cycle, and in his words it is "going to start to force some hard decisions".
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--- Written by Gus Farrow, Senior Manager, StoneX Media
--- Expert: Michael Lytle, Chief Investment Officer, StoneX Securities
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