A 5% 10YR Yield in January? Bad for Equities
With respect to the 10-year yield spike (we may hit a 5% 10YR yield before January is over), jobs data, CPI, etc. are lagging indicators. Leading inflation indicators include the money supply and fiscal spending. Higher inflation typically means higher yields, unless of course the Fed has its thumb on the scale as it has with its various QE programs, including the BTFP. A 10YR yield north of 5% will easily knock 20% off of the equity market in 1H 2025.
Both the money supply and fiscal deficits are growing. Thus, inflation ought to persist and yields ought to move higher.
On Monday Treasury will release fiscal data for the month of December. Through the first two months of fiscal 2025, the Federal Government has already racked up a $624 billion deficit, up 64% year-over-year. It will be difficult for the Trump Administration to recover and run a surplus in fiscal 2025. My view is that so long as Social Security outlays and Medicare outlays outpace GDP growth, it will be difficult to run a budget surplus. A fiscal deficit for full year 2025 would mean that Treasury would have to cover the deficit with new Treasury issuance, thereby growing the national debt (now $36 Trillion). If there is insufficient market demand to absorb that new issuance, the Fed will step in and purchase the balance to avoid a broken auction(s).
In the meantime, the Fed’s open market operations are less about reducing the Fed’s balance sheet, which stands at $7 Trillion, down from $9 Trillion in April 2022, but up from the pre-COVID figure of $4 Trillion. There is still a lot of slack in the system which means yields ought to remain elevated so long as the Fed does not meddle.
Source: Federal Reserve
