The Number of the Week Is $1.9 Trillion
(Bloomberg Opinion) -- President Joe Biden signed the $1.9 trillion American Rescue Plan Act into law on Thursday. Wall Street expects the money will supercharge the economy, with many analysts boosting their growth estimates for this year to more than 6%, and some are even forecasting as much as about 8%. Boom times, indeed, but there’s a very big wild card: the bond market.
There’s been a lot of handwringing in recent weeks over the surge in yields on U.S. government bonds. Those for the benchmark 10-year Treasury note, which help determine borrowing costs for states, companies and individuals, closed this week at 1.625%, the highest in more than a year and more than triple the 0.51% level they stood at in August.
What’s so worrisome about the spike in yields? The thinking is that the rise signals the return of the “bond vigilantes,” investors who fight back against profligate spending and bulging budget deficits by making it more expensive for the government to borrow. If yields continue to rise, it could end the coming economic boom before it begins as the cost to borrow becomes too prohibitive for companies and consumers. Let’s be clear: We’re a long way from that point.
Rather than a repudiation of debt and deficits, there is evidence that the rise in yields is more about acknowledging the current reality of the economic recovery. In other words, there is little reason for yields to remain at levels appropriate for a once-in-a-lifetime economic crisis. For confirmation, consider this week’s government debt auctions. The U.S. Treasury Department sold $120 billion of notes and bonds due in three, 10 and 30 years with no trouble.
Sure, the auctions were “average,” in that demand was neither strong nor weak. But that’s fine. Given the selloff in bonds of late, the auctions didn’t need to be stellar; they just needed to avoid being awful. The best of the lot was the three-year note sale, with bids exceeding the amount offered by 2.69 times, the most since mid-2018. The 10-year bid-to-cover ratio was 2.38, in line with the average of 2.46 over the last five years, while the 30-year saw a bid-to-cover ratio of 2.28, also in line with its average of 2.32.
Sure, deficits are big right now, with the bipartisan Congressional Budget Office saying this week that the budget shortfall has already surpassed $1 trillion for the first five months of fiscal 2021. The message from the bond auctions, though, seems to be that growth will be rapid enough to shrink the deficit in short order.
Just look at California, which on its own is one of the world’s largest economies. As my Bloomberg News colleague Romy Varghese points out, a year ago, the pandemic was threatening to drive the state toward what government officials feared would be one of the biggest financial collapses in its history. But the state’s economy has recovered to the point where Governor Gavin Newsom is expecting a $15 billion budget surplus this fiscal year.
A few metrics that were released this week showed the average American is in good shape even before the stimulus money is distributed. A Federal Reserve report Thursday showed household net worth increased by $6.9 trillion, or 5.6%, to a record $130.2 trillion in the fourth quarter. The same day, CoreLogic said homeowners gained $1.5 trillion in equity during 2020, or about $26,000 per household. And on Friday, the University of Michigan said its preliminary consumer sentiment index for March rose to the highest in a year, exceeding all but two of the 57 estimates in a Bloomberg News survey of economists.
In short, bond investors are financing a healthy and vibrant economy with a strong outlook, not one that will be on life support. This is one reason the Organization for Economic Cooperation and Development boosted its 2021 growth forecast for the U.S. to 6.5% from 3.2%. The new estimate is the highest of any developed economy and tops the 5.6% global forecast.
Another reason not to expect a “buyer’s strike” when it comes to U.S. government debt is the recent strength of the dollar. After sliding 5.45% last year — leading to concern the greenback was on the cusp of a multiyear decline — the Bloomberg Dollar Index has found its footing and is up almost 2% in 2021. Again, that is not what one would expect to see if there truly were concerns about the fiscal health of the U.S.
A rising dollar is beneficial to the bond market because it attracts foreign investors, who can reap the benefits of currency appreciation as well as some of the highest relative yields in the world. At 1.63%, 10-year Treasuries compare favorably with similar-maturity German bunds at negative 0.30%, Japanese government bonds at 0.11% and U.K. gilts at 0.83%. It’s no wonder that the Fed’s holdings of Treasuries and related securities on behalf of foreign institutions and central banks have surged this year along with rising yields to a record $3.13 trillion.
The Biden administration needs the support of the bond market if its plan to bolster the economic recovery with massive fiscal stimulus is to succeed. It seems to be getting that support so far despite the rise in bond yields.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is the Executive Editor for Bloomberg Opinion. He is the former global Executive Editor in charge of financial markets for Bloomberg News. As managing editor, he led the company’s news coverage of credit markets during the global financial crisis.
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