According to the Guinness book of world records, it’s the most fearless creature in the world.
A ferocious little critter (only about two feet long when you count their tails) that’s impervious to cobra venom, bee stings and just about every other threat that might be lurking in the African plains. (They’ll even throw down with a lion!)
They eat pretty much anything from lizards to rodents to snakes to birds and bee larvae.
We’re talking about the Mellivora Capensis… aka the Honey Badger.
And as the saying goes, “the honey badger don’t give a $#!%…”
Lately, one market has taken on a honey badger attitude.
In mid-September, the Fed decided it was time for rates to start coming down and they began a new easing cycle lowering their Fed Funds target rate by a full 50 basis points. (An aggressive move by any account!)
But like the honey badger, the bond market didn’t give a $#!%.
As the Fed started its easing cycle, yields on the 10-year note, the US’ borrowing benchmark, bottomed. And in the ensuing weeks they have actually risen from roughly 3.6% to nearly 4.25%!
US Treasury 10-Year Yield
What’s Going On?
The US has just closed out its 2024 fiscal year and the results, as expected, were abysmal.
According to Janet Yellen and the Treasury, the budget deficit hit its highest level in history. (That’s not counting the two outlier years during the pandemic stimmy giveaways.)
The total deficit for FY 2024 topped $1.8 trillion.
And while that’s bad enough on its own, in what might be the greatest irony in financial history, the largest contributor to that deficit was… interest on the debt.
If you scroll down the Treasury’s monthly statement it shows they paid out over $84 billion in interest payments in the last month of the fiscal year. That increased last year’s total interest expense by a staggering 29% to $1.13 trillion.
That was more than the government spent on Medicare and the defense budget.
Needless to say, the exploding interest cost is a serious problem.
When it comes to government debt, nothing gets retired. The Treasury simply rolls its debt over, refinancing the securities that come due. Which simply adds to the total amount of debt — increasing the interest expense they have to pay.
Now interest on the debt will soon become the biggest contributor to the debt itself.
Think about it. This year alone has added over $1 trillion to the annual base borrowing needs of the country. Before we pay for anything else. In that same 2024 fiscal year, the country took in $4.92 trillion in income. The interest cost ate up 23% of that.
This, of course, increases the amount of debt that has to be issued every year. And higher yields make that cost go up exponentially. (You don’t need to be a financial genius to know borrowing at 1% is better than 5%.)
This situation is one of the main (albeit unspoken) reasons the Fed is scrambling to lower rates — to ease the ever-expanding interest burden the spendthrifts in the government keep racking up.
The only problem with the Fed’s plan is that the funds rate is an overnight borrowing rate between banks that no longer have to maintain any reserve requirements.
So it’s basically just just for show.
It would appear the bond market (the folks who actually buy our debt and finance our deficits) knows this — and it doesn’t give a $#!%…
Election issues may be factoring into this rise in yields, but we don’t think it’s to any significant degree.
More likely the market may be reacting to what it knows is going to be an ever increasing supply of bonds they’re going to need to buy. (More supply = lower bond prices = higher bond yields.)
And this could easily force yields, as one Fed chairman once noted, to stay higher for longer. We’ll see as the week’s progress. But should the market take out previous yield highs of 5%, 6.5% could be within reach.
For now understand that when it comes to the Fed… the bond market don’t give a $#!%!