Today's hotter US consumer price index report has proven costly for both investors and the US Treasury.
The $39 billion 10-year Treasury auction sold with a yield of 4.56% compared to 4.53% before the sale. A three basis point tail is rare but it speaks to a market that's recoiling against bonds as inflation stays sticky.
Waiting one more day to release CPI data would have saved the US government $78 million per year based on today's 20 bps rise in 10-year yields, or $868 million compounded over the life of the bond.
That's still small potatoes for the US government but they do a handful of Treasury auctions every month and higher borrowing rates can quickly start to compound. Right now the US is estimated to run at $1.6 trillion deficit in FY 2024, rising to $1.8 trillion next year. That's nearly 7% of GDP and is a big reason why US GDP and inflation are beating the rest of the world.
My base case is that we get a split Congress coming out of the election and the deficit becomes a much higher priority. Even if it doesn't the spending from the CHIPS and IRA Acts fades badly in 2026, leaving the economy vulnerable.
The rise in yields will alarm the Treasury and the Fed as well. The FOMC pivoted to a more-dovish stance when rates hit 5% in October so I see that as a ceiling, if not 4.80%, which is where the murmurs began. There's also a real effect on the economy with higher rates as mortgages and loans track yields.
There is also the matter of US divergence, which is likely to fuel US dollar gains. Inflation has fallen further in Europe, the UK and Canada than in the US and is approaching levels where central banks can cut. That dynamic has spurred 1-2% US dollar gains today in what may only be a sign of what's to come.
