Fiscal Inferno! US Fiscal Gap ($200T) 10X Official Federal Debt ($20T)

The USA is in a “fiscal inferno”  where the fiscal gap is 10 times higher than the acknowledged public debt of over $20 trillion.

The fiscal gap is the present value difference between all projected future government spending obligations (including official debt service) and all projected future tax revenues. The “all” is key. The fiscal gap puts everything on the books. Since the fiscal gap is $200 trillion and the official debt is $20 trillion, Congress has kept $180 trillion of net liabilities off the books.

Unfortunately, America’s $200 trillion fiscal gap, which, scaled by GDP, is the largest of any developed country.  Closing it requires either an immediate and permanent 50 percent hike in all federal taxes or an immediate and permanent 33 percent cut in all federal spending. The longer we wait, the larger the required adjustment.

Economist Lawrence Kotlikoff measured the fiscal gap showing that the US has the world’s largest gap.


And the longer we wait to correct the problem, the worse the problem becomes.


Actually, President George HW Bush implemented fiscal gap accounting, but that was negated by President William J Clinton leaving the US in a fantasy land of fiscal denial.


Disco inferno!



Bond Trader Up $10 Million by Joining Bets Yield Curve Too Flat (Game of Drones)

Big futures trade adds to steepening momentum amid selloff.

(Bloomberg) — Traders in the $14.1 trillion Treasuries market are signaling that the persistent flattening of the yield curve this year has gone far enough.

The outperformance of longer-maturity debt has been a dominant theme in the market for months. Now, open interest data show investors are unwinding wagers that the slope of the yield curve from five to 30 years will fall, after it turned the flattest in nearly a decade.


In one case, a trader executed large block trades in 10-year and ultra-long futures. The combination created a bet on curve steepening that gains or loses $4.2 million for each basis point move in the yield spread. It’s already up more than $10 million, extending gains after Treasury’s $28 billion seven-year auction drew a yield that was below indications from before the sale.


The futures positioning reflects a sentiment shift in Treasuries as traders gain conviction that the Federal Reserve will tighten again in December and as President Donald Trump promotes his tax plan. The benchmark 10-year yield, at 2.31 percent, broke above its 200-day moving average for the first time since August.

“Selling blocks have weighed on long duration Treasury notes” as traders adjust expectations for a tax overhaul, John Herrmann, director of U.S. rate strategy at MUFG Securities Americas, wrote in a note Thursday. At the same time, shorter maturities “are barely pricing in any FOMC interest rate action beyond the December” meeting, leading the curve to steepen.

To be sure, the benchmark is right around its 2017 average, a long way from the 3 percent level that some analysts predicted to start the year. And the curve is still within spitting distance of pre-financial crisis lows. But the pullback highlights that traders may have gotten too aggressive in wagering long-term yields couldn’t move higher.
At the very least, it shows investors are wary of a repeat of the events of right around this time last year, when 10-year yields rose 75 basis points in seven weeks. Money managers in Japan, where the fiscal half-year closes Sept. 30, were hit particularly hard.  

Treasuries tumbled in Asia trading hours Thursday, with some traders saying Japanese investors are stepping back. The selling momentum intensified after the 10-year yield rose above its 200-day moving average, spurred in part by hedging with options against even-higher interest rates.

And investors aren’t just turning bearish on long-term rates. Traders are alsoadding to wagers on declining eurodollar futures, positions that profit if the market prices in more Fed hikes. The odds that policy makers boost rates again in December are about 66.6 percent, based on overnight index swaps and the effective fed funds rate. A full rate hike isn’t priced in until mid-2018.


So while Treasuries aren’t in a bear market just yet, the bullish momentum that pushed long-bond yields to the lowest since November has certainly faded. 

In other words, the hope that President Trump could undo Obama-era legislation (amongst other things) has faded to near zero.


So now we are in a Game of Thrones world where the 10 year Treasury yield has to rise faster that the 2 year yield to get the curve climbing again.



Debt Limit Gums Up Treasury’s Plan for Supply Bump as Fed Tapers

(Bloomberg) — The U.S. Treasury has been planning for years how to deal with the funding gap set to open up when the Federal Reserve begins unwinding its $2.5 trillion hoard of the government’s debt.

Now there’s a new wrinkle to prepare for, as the latest deal to extend the nation’s debt limit complicates matters for Treasury Secretary Steven Mnuchin just as the Fed is expected to unveil the start of its balance-sheet reduction.

With the debt-cap suspension expiring Dec. 8, there’s a growing sense among investors and analysts that Treasury will have to slow or hold off on the inevitable — increasing note and bond sales to deal with the shift in Fed policy and rising federal deficits. Most strategists had predicted that long-term tilt toward more coupon issuance would start in November, so a delay may provide a boost for bond bulls betting yields can stay near historic lows.

“The debt-limit issue will in the near-term affect what Treasury does with coupon issuance,” said Gene Tannuzzo, a money manager at Columbia Threadneedle, which oversees $473 billion. “At the end of the day, Treasury will have to do a lot more coupon sales. On the margin, for now, if there is less coupon issuance it is a modestly positive technical” for Treasuries.


Just how exactly Treasury will respond to the Fed’s tapering is one of the great unknowns facing investors. The mix of maturities it decides on has far-reaching implications for the world’s biggest bond market, with the potential to alter the shape of the yield curve for years to come.

A Treasury spokeswomen, Marisol Garibay, declined to comment.

That is, IF the Fed tapers their balance sheet.

The Fed is likely to cap reinvestments of Treasuries and Agency MBS rather than outright sell them out of their portfolio. Agency MBS gradually bleed off due to mortgage refinancings and Treasuries eventually mature.


If anyone is worried about the budget gap, imagine what it will look like with Bernie Care (Medicare for all)!


Since Medicare is already growing at an explosive rate.



The Hysteria Curve: US Treasury 10Y-2Y Curve Slope Declines To 78.6 BPs As 10 Year Soveriegn Yields Decline In Americas and Europe

Choose your hysteria to explain the Treasury market: 1) debt ceiling crisis, 2) hurricane (Global Warming) crisis, 3) North Korean nuclear attack crisis, 4) Trump’s Russian collusion investigation crisis, 5) the DACA (“Dreamer”) crisis, 6) Brexit crisis, 7) NAFTA crisis or 8) fill-in-the-blank crisis dejure. Please tune to CNN or MSNBC (and even Bloomberg) for the latest in hysteria.

Which ever portfolio of crises you select, we watching the US Treasury 10Y-2Y curve slope fall below 80 to the lowest slope since September 2016.


10 year sovereign yields in the Americas and Europe can down with the US falling around 10.1 BPS and Argentina down almost 40 BPS.1010

Gold prices are up since the 2016 election while the US dollar basket is down.


We are seeing a jump in equity and Treasury volatility, but not much.


Tune into MSNBC’s Rachel Maddow and Lawrence O’Donnel for particularly entertaining hysterical rants (like about Trump’s 2005 tax return).


Wall Street, Not Waiting on Mnuchin, Readies Debt-Limit War Room (Sifma revisiting, revising 2011, 2013 contingency plans)

(Bloomberg) The key industry groups that seek to prevent seismic disruptions in the world’s biggest debt market aren’t waiting around to see if Treasury Secretary Steven Mnuchin can get Congress to lift the debt limit before America exhausts its borrowing capacity.

The Securities Industry and Financial Markets Association, the $14.1 trillion Treasury market’s self-regulatory body, is revisiting and revising work done ahead of previous debt-ceiling showdowns in a bid to lessen the potential market disruption should politicians fail to raise the debt ceiling in time. The group’s primary focus is how operational issues such as trading, clearing, and settlement would be affected should debt payments get delayed. Sifma’s preparations coincide with similar efforts being undertaken by the Federal Reserve-sponsored Treasury Market Practices Group.

Call this “A View to a Shill.” Or the war room for the US invasion of Grenada.

5 year Credit Default Swaps on the US are rising, but not by much.


Although we are seeing some reaction in the swaps market, but only back to May 2017 levels.


Market participants and credit arbiters say a plan that was secretly considered by the Obama administration when the country almost breached the debt limit in 2011 signals that debt prioritization is a likely option if needed in 2017.

Good luck with that debt ceiling fight-off when mandatory Federal spending is going into warp-drive.


With Medicare leading the way.



US Debt Ceiling, The Wall, Runaway Spending And The Lack Of Evidence Of Concern … So Far (Low US CDS)

The US Statutory Debt Limit, a failed tool to halt the endless growth of Federal debt issuance, is once again in play at nearly $20 trillion. It was only at $6 trillion in 2002.


The problem, of course, is runaway Fed spending which is currently at around twice that of Federal current tax receipts, requiring that the deficit be funded by issuing Federal debt (or raising taxes and/or cutting Federal spending).


The staggering increase in Federal debt starting in 2007 also resulted in a large spike in public debt to GDP.


The US has joined the European PIGs (Portugal, Italy, Greece, as well as Cyprus and Belgium) in having debt as a percentage of GDP being over 100%. The fourth debt piggie is Spain at 99.40% debt to GDP.


The core problem with Federal spending, now and in the future, is mandatory (entitlement) spending.


Of the entitlement spending, Medicare is growing at an unsustainable rate (although Medicaid growth is no slouch either).


So we are on an ussustainable track in terms of spending. How does “the wall” with Mexico fit it? It could be funded with more taxation, or spending cuts on other programs. Democrats LOVE raising taxes, but not to build a wall. Republicans are split on building a wall (open border freemarketeers versus those with national security concerns).

My colleagues at my former employer Deutsche Bank have attempted to lay out possible funding scenarios. Although I think the odds of deep spending cuts is about as likely as North Korea embracing personal freedom and capitalism.

debt ceiling tree

With explosive Federal spending and projections of public debt exceeding first $20 and then $30 trillion, I have little doubt that Congress and President Trump will agree on a debt limit increase even if there is a momentary government shutdown.

But right now, credit default swaps are signaling no shutdown, particularly in comparison to previous shutdown fears surrounding debt ceiling increases (orange boxes).


So, there is nothing YET showing up in the CDS data. We are seeing an increase in Treasury bills rates even when the probability of a Fed increase in their rates is very low for the next year.


The probability of a US default is around 0.04%.


But there is also a realization that while there was intial enthusiam that Trump would lower taxes and deregulate the economy,  there is has a steady decline in enthusiasm over his promises since Congress is obstructing most of Trump’s economic agenda.


We can hope that Congress and President Trump follow the advice of the band Canned Heat and work together. 

But we do know that Congress loves to spend money, so they have a natural mutual allegiance to raising the debt ceiling.

Perhaps Andy Dwyer and Mouserat from Parks and Recreation can rewrite their song “The Pit” as “The Wall.”




Whip It! Univ of Michigan Inflation Remains Unchanged at 2.6% (But Declines To 2.5% For 5-10 Yr Ahead)

The University of Michigan survey of consumers just released their montly update on inflation expectations. If only The Fed’s Janet Yellen was watching consumer inflation expectations because consumers expect more inflation than The Fed’s inflation target of 2%. Apparently, The Fed is having trouble whipping inflation above 2%.

Consumer inflation expectations remained at 2.6% for August, but the expectations for inflation down the road fell to 2.5%.


Of course, 2.6% inflation is higher than The Fed’s target inflation rate of 2%. All inflation measures of core prices (excluding home prices, education, healthcare, etc) are under 2%.


As I mentioned, home prices are left out of the core inflation calculation. But if home prices WERE included, for example, we could have substantially greater inflation since YoY home price growth ranges from 5.7% to 6.9%. Wage growth is only about 2.36 – 2.5%. This indicates that home prices are growing around 2.5x wage growth.


It is clear that consumers are pricing in non-core inflation into their forecasts, such as home prices, rent, food, healthcare, tuition, textbooks, childcare, etc.

costs since 1996

Whip it (inflation) good, Janet!