Every so often, I’ll check in to show items floating around Wall Street circles and blogs.
Longer term trends in the markets and economy.
Extra details on what seems underappreciated or overhyped.
Link to some great explainers on the concepts.
**Everything as of 10/13/2023
That Austria Bond…
Interest rates on U.S. treasury bonds rose so much and so quickly in 2022 it’s now officially the worst bear market of all time for treasury bonds. (I think bonds issued by the Articles of Confederation in 1781 technically did worse by defaulting here and there)
Viewed another way, the drawdown on fixed income investments is an unprecedented waterfall for anyone alive today.
New and unique charts always spawn the gawkers, the rubberneckers and the Chicken Littles shouting the world is ending but one specific chart floating about is an especially gruesome display of fixed income pains.
In 10 months, Austria’s 100 year maturity Government bond (maturing in June 2120) has gone from 140 to 42, a loss of 70%.
This bond issuance has an annual coupon of 0.85% for the next 98 years while a freshly minted U.S. 10 year treasury bond will pay ~ 5% per year.
As always, one person’s gain is another person’s loss. The Austrian government looks like a genius! They have locked in borrowing costs for the remainder of the century at sub 1% while much of the remaining Western governments will need to pay higher and higher rates as new bond issuances naturally occur over time.
The true measure of Austria’s shrewd lockdown of rates is their interest expense - the amount of interest paid out as a percent of income or GDP. Austria will continue to run well within traditional healthy ranges for a government as % of GDP now unlike a certain other government we all know.
United States Interest Expense
Treasury Secretary Janet Yellen was recently quoted with a surprising expectation
YELLEN SAYS DEBT SERVICE COSTS WILL BE 1% OF GDP FOR THE NEXT DECADE. – Reuters
Other economists and market followers disagree. U.S. government interest expense is current 3.36% on it’s way to 5%
When Janet Yellen tells us the interest to GDP ratio will be 1% over the next ten years, she is really saying interest rates will be far below 1% on average for the next ten years.
Many such as financial commentator and Wealth manager Barry Ritholtz, spoke for years about how the U.S. government should have been doing what Austria did - issue very long term debt at rock bottom interest rates to lock in funding and keep the weighted average cost of capital low for the nation. (extending the duration does have volatility impacts but that’s the other guy’s problem)
I think Yellen is wrong on this point. As Treasury Secretary, she’s wishing out loud for what the Treasury and U.S. Government needs. Not what will happen. Over at the Federal Reserve, Jerome Powell and the other members of the FOMC are still very insistent on keeping interest rates “higher for longer”. Unlike Austria, the Interest expense of the U.S. may actually drift into bad credit risk territory in the coming years.
Thank you for reading Trader Dads. This post is public so feel free to share it.
