Things That Stick Out: Yield Curve Edition

Our brave political class is at it again.

Unable to agree on terms of a budget for the new fiscal year beginning October 1, something required by law, the Senate will likely pass a stop-gap measure Wednesday that funds the government at current levels and kicks the can past the election until December 20.

No problem. At the present rate of spending, those three months will only add another $1 trillion to the national debt.

However, it appears the precarious state of the country’s fiscal condition is getting attention from the financial markets, with the Treasury curve steepening for a sixth day to its widest level since May 2022.

Part of the steepening is attributable to the Fed’s embrace of aggressive rate cuts.

But investors are also assigning a greater risk premium to Treasuries to account for 1) the dysfunction in Washington, and 2) a foreseeable increase in borrowing. As tax revenue slows with the economy, there’s only one way for the deficit to go absent a reduction in spending.

And there’s no appetite for cutting spending, from either side of the political aisle.

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