Last week, the U.S. achieved a concerning milestone. Its debt topped $40 trillion. Readers might calculate that amounts to around $120,000 per American in debt. Historically, whenever the debt increased, the government just issued more Treasuries.
Investors bought short-term debt like the TFLO ETF, the 7-10 year (IEF), or the 20+ Year Treasury bond (TLT). The difference this time is that the government is stuck in a war with Iran. The White House wants over $1 trillion in the defense budget to shore up depleted patriot missiles.
Medicare/Medicaid accounted for around $2 trillion, Social Security cost over $1.6 trillion, and interest on debt was over $1 trillion.
What to Expect
Modest demand for Treasuries during the most recent auction lifted the 30Y yield to around 5.2%. After the Treasury secretary announced plans to double the buyback, yields briefly fell. However, the U.S. currency weakened. Expect that downtrend to continue.
Mortgage rates might rise again to match bond yields. That hurts the housing market. Watch out for D.R. Horton (DHI) re-testing lows in the $135 - $140 range. Similarly, PulteGroup (PHM), NVR (NVR), and KB Home (KBH) face selling pressure.
Banks might pull further back. JPMorgan Chase (JPM), Morgan Stanley (MS), and BofA (BAC) benefited from red-hot IPOs. But higher bond yields hurt the economy, which would pressure the banks’ core business.
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