Below are some of the most interesting articles, quotes and charts I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
The founder of the largest hedge fund in the world didn’t mince words when he was interviewed on the topic of the treasury market this week.
"We're going to have a debt crisis in this country. How fast it transpires, I think, is going to be a function of that supply-demand issue, so I'm watching that very closely." –@RayDalio https://t.co/s4ItGXwEna
— Jesse Felder (@jessefelder) September 28, 2023
What is driving us towards this “debt crisis” is a rapid rise in government debt driven by an unusually large fiscal deficit.
'Usually, deficits deepen during recessions as transfer payments to the unemployed increase. But in the US, this is that very rare deficit that has been accompanied by historically low unemployment levels.' https://t.co/y4xpyWkdlO by @johnauthers pic.twitter.com/qref2I9Tyu
— Jesse Felder (@jessefelder) September 29, 2023
At the same time, interest rates on all of that debt are also rising rapidly as major buyers have stepped back from the market.
"The Fed isn't a buyer, banks historically are a fraction of buying and now the banking system is shrinking. Put those together, Treasurys have to clear at a different price. That means higher yields—it's pretty simple." https://t.co/frS6xwYdZ7 pic.twitter.com/bLVU7aqmHH
— Jesse Felder (@jessefelder) September 25, 2023
As many emerging market economies are well aware, rapidly growing debt paired with rapidly rising interest rates is a recipe for a debt crisis.
"The rising risk premium in US Treasuries perhaps reflects tail-risk hedging against a situation where more debt leads to higher yields, as has occurred in some emerging markets." https://t.co/WFrf65RJlh pic.twitter.com/3qyjQDYCx5
— Jesse Felder (@jessefelder) September 28, 2023
At some point, the Fed may need to step in and intervene in the treasury market but that likely wouldn’t come without serious consequences for inflation.
'Intervention could involve buying bonds, thus undermining the central bank's mission to tighten policy until it defeats inflation, and resembles an official safety net for the trade.' https://t.co/uNxMwbi8zE
— Jesse Felder (@jessefelder) September 26, 2023
Thanks for reading and have a great weekend.
