Notice that the signing of a bill early this morning to keep the government open and to fund operations for two years hasn’t resulted in a serious rally in either stocks or bonds. As of 11:30 a.m. New York time the Dow Jones Industrial Average was off 0.18%, or 43 points, to 23,817. The Standard & Poor’s 500 stock index was up 0.46% to 2592. The yield on the 10-year Treasury ticked one basis point higher to 2.85% (which means that bond prices edged lower.)
And mind you, this deal also “solves” the debt ceiling crisis, which might have led to a U.S. default on its debt, by suspending the debt ceiling until March 2019. That passes for statesman-like foresight in Washington these days and this certainly counts as good news.
So why no big upside move on these events?
Because economists and Wall Street strategists can add–and they’re appalled at the total debt that Congress and the President have heaped on the books since the end of December.
The December passage of the Tax Cuts and Jobs Act will add $1 trillion to $1.5 trillion (depending on your assumptions about economic growth) to the deficit over the next ten years.
The deal completed this morning will added $320 billion to the deficit over the next two years–and that total would be higher without the sale of oil from the Strategic Petroleum Reserve.
And Congress and the President aren’t done. The White House has proposed spending an additional $200 billion in taxpayer money to leverage a projected $1 trillion to $1.5 trillion (again the total depends on who is doing the counting) in infrastructure spending using mostly private money.
Even before the latest spending increase, the U.S. Treasury was projecting that it needed to fell $1 trillion in Treasury debt in 2018. Wall Street and bond traders and investors have their doubts about how well these sales will go and how much more in interest payments bond buyers will demand to swallow this huge lump of paper. (Of course, this won’t be the last lump of debt that global bond buyers will be asked to digest. Projections show the Treasury having to sell even more debt in 2019 and 2020. The U.S. deficit is on track to exceed 5% of GDP in 2019. That would be the highest ever in an economy not mired in recession.)
Treasury sales this week don’t inspire confidence. Yesterday’s auction of $16 billion in 30-year Treasuries resulted in a yield of 3.121%. That was higher than projected before the sale. Indirect bidders, an important class of investors that includes pensions and mutual funds, bought just 61.2% of the debt on offer. That was the lowest rate of participation by this group since September. That’s an important and disheartening trend since central banks, including the Federal Reserve, are reducing their purchases of Treasuries as they move away from policies of quantitative easing.