Treasury Yields May Trail GDP for Decades in Debt-Trap Fallout

LONDON (Capital Markets in Africa) – Benchmark Treasury yields have trailed U.S. nominal growth rates for almost a decade — and will continue to do so for at least into the 2040s as the nation’s debt mounts, according to Deutsche Bank AG’s Jim Reid.

Fiscal policy will play a bigger role in supporting future growth in the world’s largest economy, entailing more borrowings, and monetary policy would need to keep interest rates capped to help ease the financing burden — so goes the hypothesis. And that suggests yields will remain suppressed below the nominal expansion rates for a long time, according to the strategist.

Ten-year Treasury yields have languished below the pace of U.S. nominal gross-domestic-product expansion since 2010 as government borrowings steadily climbed. Treasury debt has already grown by almost 20% since 2017 to over $16.5 trillion as the U.S. deficit widened under President Donald Trump.

“We’ve built a system that is too reliant on debt, therefore if it does collapse we have a big problem” so “you probably have to reflate into that debt,” Reid, the global head of fundamental credit strategy at Deutsche Bank, said on Bloomberg TV Tuesday. “The only way you can do that is to use fiscal policy and then have monetary policy support that. For the rest of my career, I think nominal yields will be below nominal GDP — to try to support that.”

The Federal Reserve has previously thrown cold water on the idea that it could help combat the impact of spiraling deficits by keeping interest rates low. Chairman Jerome Powell in February said Modern Monetary Theory, which argues for this monetary support, was “Just Wrong.”

In a note published Wednesday, Reid said he had received several questions on his Bloomberg TV comments, and provided a rough estimate on how long until he retires.

“Clearly for reasons of which I’m not aware of, my career might not have long left but given a new house this year, building renovations that cost the original estimate times Pi, and school/university fees into the 2040s — that’s how long I might need to work and how long I think this period of financial repression might need to last,” Reid wrote.

Annual growth in America’s nominal gross domestic product is running at about 3.7%, compared with the 10-year Treasury rate at 1.75%.

Source: Bloomberg Business News