13 ms·

10-year Treasury yield rises to 5%, highest level for the key rate in 16 years

56 points by donsupreme 3y ago

QuarterReptile 3y ago
If I'm remembering long-ago reading on the topic, 5% is near the point at which interest service on debts exceeds all government revenue (once enough of bonds have turned over at this interest rate to actually be the effective rate being paid out on the population of 10-year T-bills.) What is the way to interpret this situation as other than a 10 year countdown to chaos? Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)? From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing.
- deleted 3y ago
  [deleted]
- sugarpile 3y ago
  I'm not informed enough on the topic to speak anything near authoritatively but there was an essay posted here ~6(?) months ago that spoke about how >2-3% inflation effectively serves as a means of effectively reducing government debt. I would imagine your 5% number has to assume some baseline of inflation and that 5% would increase as inflation increases beyond said baseline.
  - QuarterReptile 3y ago
    It's true, you can gradually default on the government's obligations by changing their denomination to make the underlying promises worthless. That's consistent with my third hypothesized path. I don't see any way that inflation jumps gently in that case. I'm suspecting we wouldn't jump straight to hyperinflation, but annual inflation 30-50% would be my guess for the first couple years that 0% of government services were covered by revenue.
- ramesh31 3y ago
  >From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing. ...or we just change the price of a dollar. It's good to be the king. https://en.wikipedia.org/wiki/Modern_monetary_theory#Government_bonds_and_interest_rate_maintenance https://en.wikipedia.org/wiki/Modern_monetary_theory#Governm...
  - spaceman_2020 3y ago
    The King scared away its biggest buyers with the sanctions on Russia. China is dumping its dollars. Other non-western countries like India have been slow to add to their reserves after the Russia sanctions as well.
    - ramesh31 3y ago
      >China is dumping its dollars. For what, though? This is a matter of China needing cash, not exchanging one investment for another.
      - DSingularity 3y ago
        If you say so.
    - dgellow 3y ago
      Far from being an expert but from my understanding China’s economy is in a fairly difficult situation at the moment. They are selling because they urgently need lot of cash, not because they are afraid of USD value.
      - spaceman_2020 3y ago
        Any country that’s not completely within USA sphere of influence would rationally not want to hold dollars after what they did to Russia’s reserves.
- saalweachter 3y ago
  > (which are unlikely to work, based on Laffer curve) Doesn't that assume we are currently sitting at the optimal point of the curve? Is there any reason to think that is the case?
  - wing-_-nuts 3y ago
    Considering that other nations with similar growth rates have much higher taxes, I'd say the evidence is that our current tax rates amount to a giveaway for the rich. Of course, they also happen to be the ones with real political power (see Grover Norquist), so nothing is likely to change any time soon.
    - username332211 3y ago
      Considering that other nations with similar growth rates have implemented VAT, I'd say the evidence is current American tax rates don't amount to a giveaway to the rich. Rather the opposite in fact.
      - wing-_-nuts 3y ago
        I don't see anything wrong with taxing consumption. I've long advocated for a revenue neutral carbon tax, for example
        QuarterReptile 3y ago
        I'll point out what I believe the other commenter was alluding to. 1.Consumption taxes are generally considered regressive because poorer people end up consuming a greater proportion of their incomes and thus paying taxes again on more of their earnings. 2.People who talk about a 'giveaway to the rich' or who advocate for 'tax the rich' generally mean to draw a distinction and say that the rich need to pay an even higher proportion of taxes than the do at the moment. 'The rich' is seldom (I believe never) meant as metonymy. 3. Advocating for consumption taxes is thus advocating against taxing the rich more, and vice versa.
  - 3y ago
- tracer4201 3y ago
  > Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)? American politicians, deliberately or out of incompetence, use the crisis of the moment and conveniently forego this topic. I’m convinced the next US administration HAS to do something about this. I don’t see a way that doesn’t involve both spending cuts and raising taxes. I don’t like discussing politics on HN, but I think this should be deeply concerning for anyone interested in start ups, technology, or innovation. All of our innovation is enabled by having a somewhat functioning democracy, courts, cops, civic culture, where people have the opportunity to critically think about hard problems and innovate, because they’re not worried so much about near term survival.
  - QuarterReptile 3y ago
    For some bizarre reason, someone flagged your comment...
  - landemva 3y ago
    > enabled by having a somewhat functioning democracy, courts, cops, civic culture Grab the popcorn for ten years until US divorces. States don't get along anymore, and Feds are out of control. Democracy - when do I get to vote on the current two war fronts? Courts - long history of corruption, particularly against minorities. No lawyer in local courts and you lose. Feds have ridiculous rate of plea bargains. Cops - and govts have broad immunity against lawsuits to hold them accountable. Defund the FBI was relevant for the last five decades, and they keep spying on Americans because we allow it. Culture - free to choose what you ingest.
- ghastmaster 3y ago
  > If I'm remembering long-ago reading on the topic, 5% is near the point at which interest service on debts exceeds all government revenue A key thing to note here is that the US government typically holds shorter term notes which have much lower yields than their 10y counterpart.
  - username332211 3y ago
    That's not true. Short term bonds currently carry higher interest than longer term ones, that's what "inverted yield curve" is all about.[1] [1] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202310 https://home.treasury.gov/resource-center/data-chart-center/...
    - thunky 3y ago
      An inverted yield curve is not typical.
- gregshap 3y ago
  Quick math $33T US national debt times 5% is $1.65B. Federal revenue around $5B in 2022 so not quite there but very substantial.
  - codenesium 3y ago
    I think you're missing several orders of magnitude on that math. Maybe a T instead of a B.
  - HumblyTossed 3y ago
    > Quick math... slow down there. 1.65T.
  - gregshap 3y ago
    Too late to edit, all supposed to be T’s. Quick math even quicker keyboard.
- TacticalCoder 3y ago
  > What is the way to interpret this situation as other than a 10 year countdown to chaos? Officials sadly have realized that they have a solution to everything: inflation. What is really hilarious is that it's officially to "combat inflation" but their only way out is inflation because they're never ever repaying that debt. > cease to pretend that the US currency is a stable trading platform It is toilet paper. But so is the EUR / JPY / etc. Wealth is anything that is not that toilet paper.
- ben_w 3y ago
  > based on Laffer curve Everyone has an opinion on the optimal part of the Laffer curve. Evidence may even exist for some of these claims, but we've all got an obvious clear incentive to want lower taxes today while downplaying the long-term risks of the government failing to invest in the future, so I tend to assume we can sustain higher taxes more easily than the loudest voices[0] tell me. [0] Unless those voices are literally, non-pejoratively, Communists; but even then that's not because they're wrong about the Laffer curve itself, but that the people still promoting Communism today tend to also gloss over all the other mistakes made by the historical examples thereof…
- addicted 3y ago
  Aside from the fact that the Laffer curve has never been proven accurate in the U.S. based on actual empirical data, it can be proven trivially false, because it implies the closer your tax rate gets to 0 the more tax receipts you will have. So you’re gonna get far more tax receipts at a 0.0001% interest rate than at a 10% interest rate, which would require a GDP at 0.0001% which would be beyond any actual possibility.
  - QuarterReptile 3y ago
    You've bounced back and forth between interest rates and tax rates and percentages of GDP, I think. I'm not quite clear on what you're saying.
  - bitshiftfaced 3y ago
    Eh? My understanding wasn't that the tax receipts increase as you get closer to a tax rate of zero. Wasn't the point that maximum receipts happen somewhere in the middle, but obviously tax receipts are 0 when the rate is at 0% or 100% (and closer to 0 when near the extremes)?
  - pandaman 3y ago
    It's a bound, non-negative function on [0,1], equal 0 at 0 and 1 and having non-zero values at least in some points on (0,1). You are saying it's never been proven that such a function will have a maximum value somewhere in (0,1) in the US? Your proof of the opposite, unfortunately, does not seem right.
- 0cf8612b2e1e 3y ago
  The “Kansas Experiment”, built upon the Laffer Curve idea would indicate it is not worth much[0]. There is of course, lots of conservative discourse on why it failed (not extreme enough, just needed to go longer, etc) [0] https://en.m.wikipedia.org/wiki/Kansas_experiment https://en.m.wikipedia.org/wiki/Kansas_experiment
spaceman_2020 3y ago
ELI5: What does this mean for the economy and markets?
- deadghost 3y ago
  tl;dr: stocks go down, investors less aggressive, tech job market stays dipped US Treasury Bonds are considered the risk-free rate. If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. You'd buy a Treasury bond instead to get 5% risk-free. As a consequence, stock prices should drop until yields + premium to take on risk exceeds the risk-free rate.
  - addaon 3y ago
    > If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. If the expected value of the investment is 5%, that expectation incorporates the risk. There's a chance it yields -100%, there's a chance it yields 5%, there's a chance it yields 100%, etc. If your value of money is linear, you shouldn't have a preference between a(n individual) 5% investment with high variance and one with low variance. It's perfectly reasonable to prefer low variance for a given expected return, but it's also perfectly reasonable to prefer high variance; and of course a portfolio has an expected return and variance that's a non-trivial combination (due to correlated movement) of its individual investments.
  - MuffinFlavored 3y ago
    > stays dipped stays dipped or this is the beginning of the dip and continues to dip further is a fear/the fear
- nine_zeros 3y ago
  Debt is continuing to become more and more expensive. Lenders are not lending to people or companies unless the interest rate is much higher than the risk-free 5% offered by the US government. VCs are not getting funds from LPs who all would much rather invest in US government treasuries for the easy 5%. Public stocks are often bought with margin money (which is leverage, aka debt). Now, margin money lenders are charging a higher interest rate on that margin, causing borrowers of margin money to not borrow as much. Thus, stocks are not being bid up as much, causing stock prices to drop. Mortgage rates track the 10-year Treasury yield and thus mortgage loan rates are going higher and higher. Housing market is expected to sag, if not go into a correction or a crash. For the average person, the only parts that are affected are: 1. If their employer is dependent on cheap money (real estate, VC tech, growth stocks) these employers will either need to innovate HARD or start laying off people under pressure from investors. 2. If you were looking to borrow money for some reason (say, a house or a car), you are looking at insane interest rates. But all of this happens in any interest rate rise. What is interesting about this particular threshold of 5% is that the world hasn't seen US treasury rates at this level since the last great recession. Most companies, stock holders, people in general don't know how to evaluate this new world of a higher rate. Should you buy that car you desperately need? Is relocation for an RTO job even possible? Higher interest rates, lower investment rates can have a devastating impact on people's lives.
marcrosoft 3y ago
One effect of this is that stocks historically average about 8% a year. As this gets closer to that number you can expect money from the stock market to start pouring into bonds. Why take risk when you have a guaranteed yield? This will probably drive the market down much further than it has in 2022.
- boringg 3y ago
  Average is not a great way to measure about stock returns - though it helps illustrate your point. Equity can evaporate -- unlikely US T will though the politicians certainly are trying.
  - username332211 3y ago
    Intuitively it doesn't make sense, but companies can outlast bonds, currencies and indeed the governments that issue them. Daimler-Benz has survived the fall of 3 German governments, the loss of 2 rather large wars and a number of periods of hyper-inflation that accompanied them that'd have made any bond worthless. We're not there yet, but people do go bankrupt gradually and then suddenly.
    - boringg 3y ago
      Fair but I would say that is by far an exception rather then anywhere close to the norm.
- jgalt212 3y ago
  Yes, but taxes on capital gains are much, much lower than taxes on interest. You probably need bond yields to be about 10-12% to be tax equivalent to equities returns. Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!
  - toomuchtodo 3y ago
bookofjoe 3y ago
That's eye-opening. tl;dr: You will receive $10,000 in 10 years by investing $6,140 today in the world's safest security.
- ericpauley 3y ago
  The downside is that $10,000 may only be enough to buy a stick of gum in 2033.
  - gnulinux 3y ago
    Correct me if I'm wrong... If you buy an actively managed money market fund (such as VMRXX by Vanguard) when Federal interest rates go up wouldn't the return from your VMRXX assets also go up? In other words, if in 2033 a stick of gum is $10000, which implies there was high inflation between 2023 and 2033, which likely means Fed increased rates even more, wouldn't that cause your rate of return to go above 5% and therefore roughly maintain the value of your assets (assuming Fed keeps interest rates above inflation)?
    - MuffinFlavored 3y ago
      Could you explain why somebody might do VMRXX instead of VMFXX?
    - ericpauley 3y ago
      Only if real rates are positive: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
- username332211 3y ago
  Weren't there 3 or 4 banks that went bankrupt at the start of the year, because they underestimated the risk of holding "the world's safest security"?
  - smileysteve 3y ago
    Not because the security wasn't safe, but because they held too much of it at an unprofitable rate, and effectively illiquid because of its maturity date. The likely reason you see banks offering high interest CDs, is because it facilitates them slowly rolling over their long term bond portfolios by attracting CD investment. Especially if they are beating the 1 yr treasury rate, they are losing money to lose less than they would rolling over their bonds. An unfortunate thing for the banks is that CDs aren't as attractive as they were in the past because technology (ETFs, internet brokers) have made treasuries more accessible
boringg 3y ago
5.6% Yields right now for the next 6 months. Hold for 2 years yields drop to 5%. We still have an inverted yield curve. hold for 20 Y >> 5.3%
- dragontamer 3y ago
  Over the long term, the yield will uninvert and normalize. The problem is that we don't know if it will happen with short-term rates dropping, or if long-term rates increasing (or which combination thereof). If short-term rates remain 5.5%+ like they are today, the yield-curve could normalize with 10Y being at 7% or higher, meaning today's 10Y at 5% would be a bad buy. Alternatively, if short-term rates drop to 3% and thus 10Y declines to 4.5% (but still normalizes), then buying 10Y at 5% today would be a good idea and better than buying a 10Y later.
mg 3y ago
I am sceptical that this is really bad for the stock market. Those 5% must come from somewhere. Either from a growing economy: Good for the stock market. Or from freshly printed money: Also good for the stock market. The "risk free" interest rate is not really risk free. You do not get back 2023 Dollars. You get back future Dollars, which are devalued by a currently unknown factor.
- eatsyourtacos 3y ago
  The bigger point is.. who the f cares? This obsession with the stock market is probably one of the worst inventions in human history.
  - Supermancho 3y ago
    > The bigger point is.. who the f cares? Investment firms and other orgs with large amounts of money, seeking what they always seek. More money. As I understand it, banks invested heavily in bonds which give under 2% return, but because of the cheap 5% bonds, they can't even dump them to capitalize on the 5%, because nobody wants to buy the old 2%. https://www.youtube.com/watch?v=sixGjiYSxAk https://www.youtube.com/watch?v=sixGjiYSxAk
  - sneed_chucker 3y ago
    Unfortunately the life savings and retirement plans of most of the world's middle class is tied up in it.
    - landemva 3y ago
      The world, or the US? Government pensions are widespead in Europe. And middle class USA savings is paying down their house mortgage.
      - sneed_chucker 3y ago
        What do you think government pensions are invested in?
yeouch 3y ago
How is this sustainable? What is the solution? Austerity? Inflation?
- brad0 3y ago
  Austerity, taxing the rich, restructure debt, printing money. This video by Ray Dalio explains it much better than I ever could: https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
- missedthecue 3y ago
  I wish there could be an intelligent conversation about this. I feel like whenever I bring it up, i'm immediately mentally labeled a doomer, prepper, or Gingrich era republican, when the way I see it, this is totally apolitical and just 6th grade math. It's clearly not sustainable to be growing the national debt at 2 or 3 trillion per year, and especially not at 5% interest rates. People bring up Japan as some sort of model that GDP/Debt can go much higher than the US is currently at, while missing that Japan is paying 0.76% on the 10-yr notes today. In many ways, Japan is lucky that their economy is so tepid and impotent because if they had caught the inflation bug like the US, they would have had to raise rates significantly. Needless to say, debt levels at 270% of GDP with 5% rates would cause a fiscal catastrophe in Japan. Their interest payments alone would exceed all government revenue. They would have to cut 100% of government services (military, medical, pensions, administration, legislation, the courts) AND raise taxes, or issue mountains of new debt in some sort of horrible debt spiral until there was no more demand for yen bonds, at which point there would be sovereign bankruptcy I suppose? IMF bailout of Japan? At current rates, US government debt will hit $41 trillion this time next year. It grew $604 billion in the last thirty days, and every bond sold is at 5% interest or more. It's just not something that can be done forever unless the US economy starts growing 10-15% per year, or unless rates can be pushed down to 0% indefinitely with no negative consequences. One thing is for sure, your current tax rate you are paying is as low as it will be for the rest of your lifetime.
- marcosdumay 3y ago
  It's not unsustainable if that's your question. There's no mechanism that automatically turn this into some clear case of failure. As a consequence, "what is the solution?" will get sidelined by the question of "should we even solve anything?", even though high interest rates are clearly damaging. On the actual question of how to solve it, I don't have any answer. Both austerity and inflation come with side-effects that may or may not increase that rate even more.
bookofjoe 3y ago
>Five Investors on Investing in the 5% World https://www.wsj.com/finance/investing/five-investors-on-investing-in-the-5-world-f8e6e516?mod=hp_lead_pos7 https://www.wsj.com/finance/investing/five-investors-on-inve... https://archive.ph/NCv4a https://archive.ph/NCv4a
- boringg 3y ago
  Thanks - some interesting perspective.
theanonymousone 3y ago
Sorry for the stupid question. Does 5% mean 5% per year (over ten years), or 5% per 10 years?
- naveen99 3y ago
  Per year.
  - theanonymousone 3y ago
    Meaning a 62% increase of the original investment after 10 years? Isn't that a very good deal?
    - naveen99 3y ago
      It may be. depends where you are on the spectrum of being a saver or a borrower.

56 points by donsupreme 3y ago

If I'm remembering long-ago reading on the topic, 5% is near the point at which interest service on debts exceeds all government revenue (once enough of bonds have turned over at this interest rate to actually be the effective rate being paid out on the population of 10-year T-bills.) What is the way to interpret this situation as other than a 10 year countdown to chaos? Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)? From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing.

deleted 3y ago
[deleted]
sugarpile 3y ago
I'm not informed enough on the topic to speak anything near authoritatively but there was an essay posted here ~6(?) months ago that spoke about how >2-3% inflation effectively serves as a means of effectively reducing government debt. I would imagine your 5% number has to assume some baseline of inflation and that 5% would increase as inflation increases beyond said baseline.
- QuarterReptile 3y ago
  It's true, you can gradually default on the government's obligations by changing their denomination to make the underlying promises worthless. That's consistent with my third hypothesized path. I don't see any way that inflation jumps gently in that case. I'm suspecting we wouldn't jump straight to hyperinflation, but annual inflation 30-50% would be my guess for the first couple years that 0% of government services were covered by revenue.
ramesh31 3y ago
>From where I'm sitting, once the debt service exceeds revenue, we'll have to get in a big war, destabilize domestic affairs with tax hikes (which are unlikely to work, based on Laffer curve), or cease to pretend that the US currency is a stable trading platform. I guess the third option seems alright for the rest of the world, except no one else's seems to be particularly appealing. ...or we just change the price of a dollar. It's good to be the king. https://en.wikipedia.org/wiki/Modern_monetary_theory#Government_bonds_and_interest_rate_maintenance https://en.wikipedia.org/wiki/Modern_monetary_theory#Governm...
- spaceman_2020 3y ago
  The King scared away its biggest buyers with the sanctions on Russia. China is dumping its dollars. Other non-western countries like India have been slow to add to their reserves after the Russia sanctions as well.
  - ramesh31 3y ago
    >China is dumping its dollars. For what, though? This is a matter of China needing cash, not exchanging one investment for another.
    - DSingularity 3y ago
      If you say so.
  - dgellow 3y ago
    Far from being an expert but from my understanding China’s economy is in a fairly difficult situation at the moment. They are selling because they urgently need lot of cash, not because they are afraid of USD value.
    - spaceman_2020 3y ago
      Any country that’s not completely within USA sphere of influence would rationally not want to hold dollars after what they did to Russia’s reserves.
saalweachter 3y ago
> (which are unlikely to work, based on Laffer curve) Doesn't that assume we are currently sitting at the optimal point of the curve? Is there any reason to think that is the case?
- wing-_-nuts 3y ago
  Considering that other nations with similar growth rates have much higher taxes, I'd say the evidence is that our current tax rates amount to a giveaway for the rich. Of course, they also happen to be the ones with real political power (see Grover Norquist), so nothing is likely to change any time soon.
  - username332211 3y ago
    Considering that other nations with similar growth rates have implemented VAT, I'd say the evidence is current American tax rates don't amount to a giveaway to the rich. Rather the opposite in fact.
    - wing-_-nuts 3y ago
      I don't see anything wrong with taxing consumption. I've long advocated for a revenue neutral carbon tax, for example
      - QuarterReptile 3y ago
        I'll point out what I believe the other commenter was alluding to. 1.Consumption taxes are generally considered regressive because poorer people end up consuming a greater proportion of their incomes and thus paying taxes again on more of their earnings. 2.People who talk about a 'giveaway to the rich' or who advocate for 'tax the rich' generally mean to draw a distinction and say that the rich need to pay an even higher proportion of taxes than the do at the moment. 'The rich' is seldom (I believe never) meant as metonymy. 3. Advocating for consumption taxes is thus advocating against taxing the rich more, and vice versa.
- 3y ago
tracer4201 3y ago
> Hope that we reign in spending in a drastic, unprecedented way (without impacting revenue as well...)? American politicians, deliberately or out of incompetence, use the crisis of the moment and conveniently forego this topic. I’m convinced the next US administration HAS to do something about this. I don’t see a way that doesn’t involve both spending cuts and raising taxes. I don’t like discussing politics on HN, but I think this should be deeply concerning for anyone interested in start ups, technology, or innovation. All of our innovation is enabled by having a somewhat functioning democracy, courts, cops, civic culture, where people have the opportunity to critically think about hard problems and innovate, because they’re not worried so much about near term survival.
- QuarterReptile 3y ago
  For some bizarre reason, someone flagged your comment...
- landemva 3y ago
  > enabled by having a somewhat functioning democracy, courts, cops, civic culture Grab the popcorn for ten years until US divorces. States don't get along anymore, and Feds are out of control. Democracy - when do I get to vote on the current two war fronts? Courts - long history of corruption, particularly against minorities. No lawyer in local courts and you lose. Feds have ridiculous rate of plea bargains. Cops - and govts have broad immunity against lawsuits to hold them accountable. Defund the FBI was relevant for the last five decades, and they keep spying on Americans because we allow it. Culture - free to choose what you ingest.
ghastmaster 3y ago
> If I'm remembering long-ago reading on the topic, 5% is near the point at which interest service on debts exceeds all government revenue A key thing to note here is that the US government typically holds shorter term notes which have much lower yields than their 10y counterpart.
- username332211 3y ago
  That's not true. Short term bonds currently carry higher interest than longer term ones, that's what "inverted yield curve" is all about.[1] [1] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202310 https://home.treasury.gov/resource-center/data-chart-center/...
  - thunky 3y ago
    An inverted yield curve is not typical.
gregshap 3y ago
Quick math $33T US national debt times 5% is $1.65B. Federal revenue around $5B in 2022 so not quite there but very substantial.
- codenesium 3y ago
  I think you're missing several orders of magnitude on that math. Maybe a T instead of a B.
- HumblyTossed 3y ago
  > Quick math... slow down there. 1.65T.
- gregshap 3y ago
  Too late to edit, all supposed to be T’s. Quick math even quicker keyboard.
TacticalCoder 3y ago
> What is the way to interpret this situation as other than a 10 year countdown to chaos? Officials sadly have realized that they have a solution to everything: inflation. What is really hilarious is that it's officially to "combat inflation" but their only way out is inflation because they're never ever repaying that debt. > cease to pretend that the US currency is a stable trading platform It is toilet paper. But so is the EUR / JPY / etc. Wealth is anything that is not that toilet paper.
ben_w 3y ago
> based on Laffer curve Everyone has an opinion on the optimal part of the Laffer curve. Evidence may even exist for some of these claims, but we've all got an obvious clear incentive to want lower taxes today while downplaying the long-term risks of the government failing to invest in the future, so I tend to assume we can sustain higher taxes more easily than the loudest voices[0] tell me. [0] Unless those voices are literally, non-pejoratively, Communists; but even then that's not because they're wrong about the Laffer curve itself, but that the people still promoting Communism today tend to also gloss over all the other mistakes made by the historical examples thereof…
addicted 3y ago
Aside from the fact that the Laffer curve has never been proven accurate in the U.S. based on actual empirical data, it can be proven trivially false, because it implies the closer your tax rate gets to 0 the more tax receipts you will have. So you’re gonna get far more tax receipts at a 0.0001% interest rate than at a 10% interest rate, which would require a GDP at 0.0001% which would be beyond any actual possibility.
- QuarterReptile 3y ago
  You've bounced back and forth between interest rates and tax rates and percentages of GDP, I think. I'm not quite clear on what you're saying.
- bitshiftfaced 3y ago
  Eh? My understanding wasn't that the tax receipts increase as you get closer to a tax rate of zero. Wasn't the point that maximum receipts happen somewhere in the middle, but obviously tax receipts are 0 when the rate is at 0% or 100% (and closer to 0 when near the extremes)?
- pandaman 3y ago
  It's a bound, non-negative function on [0,1], equal 0 at 0 and 1 and having non-zero values at least in some points on (0,1). You are saying it's never been proven that such a function will have a maximum value somewhere in (0,1) in the US? Your proof of the opposite, unfortunately, does not seem right.
0cf8612b2e1e 3y ago
The “Kansas Experiment”, built upon the Laffer Curve idea would indicate it is not worth much[0]. There is of course, lots of conservative discourse on why it failed (not extreme enough, just needed to go longer, etc) [0] https://en.m.wikipedia.org/wiki/Kansas_experiment https://en.m.wikipedia.org/wiki/Kansas_experiment

spaceman_2020 3y ago

ELI5: What does this mean for the economy and markets?

deadghost 3y ago
tl;dr: stocks go down, investors less aggressive, tech job market stays dipped US Treasury Bonds are considered the risk-free rate. If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. You'd buy a Treasury bond instead to get 5% risk-free. As a consequence, stock prices should drop until yields + premium to take on risk exceeds the risk-free rate.
- addaon 3y ago
  > If you have $TICKER that you expect to yield 5%, you wouldn't buy it because you undertake risk to invest in a company to get 5%. If the expected value of the investment is 5%, that expectation incorporates the risk. There's a chance it yields -100%, there's a chance it yields 5%, there's a chance it yields 100%, etc. If your value of money is linear, you shouldn't have a preference between a(n individual) 5% investment with high variance and one with low variance. It's perfectly reasonable to prefer low variance for a given expected return, but it's also perfectly reasonable to prefer high variance; and of course a portfolio has an expected return and variance that's a non-trivial combination (due to correlated movement) of its individual investments.
- MuffinFlavored 3y ago
  > stays dipped stays dipped or this is the beginning of the dip and continues to dip further is a fear/the fear
nine_zeros 3y ago
Debt is continuing to become more and more expensive. Lenders are not lending to people or companies unless the interest rate is much higher than the risk-free 5% offered by the US government. VCs are not getting funds from LPs who all would much rather invest in US government treasuries for the easy 5%. Public stocks are often bought with margin money (which is leverage, aka debt). Now, margin money lenders are charging a higher interest rate on that margin, causing borrowers of margin money to not borrow as much. Thus, stocks are not being bid up as much, causing stock prices to drop. Mortgage rates track the 10-year Treasury yield and thus mortgage loan rates are going higher and higher. Housing market is expected to sag, if not go into a correction or a crash. For the average person, the only parts that are affected are: 1. If their employer is dependent on cheap money (real estate, VC tech, growth stocks) these employers will either need to innovate HARD or start laying off people under pressure from investors. 2. If you were looking to borrow money for some reason (say, a house or a car), you are looking at insane interest rates. But all of this happens in any interest rate rise. What is interesting about this particular threshold of 5% is that the world hasn't seen US treasury rates at this level since the last great recession. Most companies, stock holders, people in general don't know how to evaluate this new world of a higher rate. Should you buy that car you desperately need? Is relocation for an RTO job even possible? Higher interest rates, lower investment rates can have a devastating impact on people's lives.

marcrosoft 3y ago

One effect of this is that stocks historically average about 8% a year. As this gets closer to that number you can expect money from the stock market to start pouring into bonds. Why take risk when you have a guaranteed yield? This will probably drive the market down much further than it has in 2022.

boringg 3y ago
Average is not a great way to measure about stock returns - though it helps illustrate your point. Equity can evaporate -- unlikely US T will though the politicians certainly are trying.
- username332211 3y ago
  Intuitively it doesn't make sense, but companies can outlast bonds, currencies and indeed the governments that issue them. Daimler-Benz has survived the fall of 3 German governments, the loss of 2 rather large wars and a number of periods of hyper-inflation that accompanied them that'd have made any bond worthless. We're not there yet, but people do go bankrupt gradually and then suddenly.
  - boringg 3y ago
    Fair but I would say that is by far an exception rather then anywhere close to the norm.
jgalt212 3y ago
Yes, but taxes on capital gains are much, much lower than taxes on interest. You probably need bond yields to be about 10-12% to be tax equivalent to equities returns. Using your 401K, you can create tax equivalency between stock and bond returns. But then that creates perverse outcome of putting shorter duration / lower risk assets in your longer duration savings account. Thanks Washington!
- toomuchtodo 3y ago

bookofjoe 3y ago

That's eye-opening. tl;dr: You will receive $10,000 in 10 years by investing $6,140 today in the world's safest security.

ericpauley 3y ago
The downside is that $10,000 may only be enough to buy a stick of gum in 2033.
- gnulinux 3y ago
  Correct me if I'm wrong... If you buy an actively managed money market fund (such as VMRXX by Vanguard) when Federal interest rates go up wouldn't the return from your VMRXX assets also go up? In other words, if in 2033 a stick of gum is $10000, which implies there was high inflation between 2023 and 2033, which likely means Fed increased rates even more, wouldn't that cause your rate of return to go above 5% and therefore roughly maintain the value of your assets (assuming Fed keeps interest rates above inflation)?
  - MuffinFlavored 3y ago
    Could you explain why somebody might do VMRXX instead of VMFXX?
  - ericpauley 3y ago
    Only if real rates are positive: https://fred.stlouisfed.org/series/REAINTRATREARAT10Y https://fred.stlouisfed.org/series/REAINTRATREARAT10Y
username332211 3y ago
Weren't there 3 or 4 banks that went bankrupt at the start of the year, because they underestimated the risk of holding "the world's safest security"?
- smileysteve 3y ago
  Not because the security wasn't safe, but because they held too much of it at an unprofitable rate, and effectively illiquid because of its maturity date. The likely reason you see banks offering high interest CDs, is because it facilitates them slowly rolling over their long term bond portfolios by attracting CD investment. Especially if they are beating the 1 yr treasury rate, they are losing money to lose less than they would rolling over their bonds. An unfortunate thing for the banks is that CDs aren't as attractive as they were in the past because technology (ETFs, internet brokers) have made treasuries more accessible

boringg 3y ago

5.6% Yields right now for the next 6 months. Hold for 2 years yields drop to 5%. We still have an inverted yield curve. hold for 20 Y >> 5.3%

dragontamer 3y ago
Over the long term, the yield will uninvert and normalize. The problem is that we don't know if it will happen with short-term rates dropping, or if long-term rates increasing (or which combination thereof). If short-term rates remain 5.5%+ like they are today, the yield-curve could normalize with 10Y being at 7% or higher, meaning today's 10Y at 5% would be a bad buy. Alternatively, if short-term rates drop to 3% and thus 10Y declines to 4.5% (but still normalizes), then buying 10Y at 5% today would be a good idea and better than buying a 10Y later.

mg 3y ago

I am sceptical that this is really bad for the stock market. Those 5% must come from somewhere. Either from a growing economy: Good for the stock market. Or from freshly printed money: Also good for the stock market. The "risk free" interest rate is not really risk free. You do not get back 2023 Dollars. You get back future Dollars, which are devalued by a currently unknown factor.

eatsyourtacos 3y ago
The bigger point is.. who the f cares? This obsession with the stock market is probably one of the worst inventions in human history.
- Supermancho 3y ago
  > The bigger point is.. who the f cares? Investment firms and other orgs with large amounts of money, seeking what they always seek. More money. As I understand it, banks invested heavily in bonds which give under 2% return, but because of the cheap 5% bonds, they can't even dump them to capitalize on the 5%, because nobody wants to buy the old 2%. https://www.youtube.com/watch?v=sixGjiYSxAk https://www.youtube.com/watch?v=sixGjiYSxAk
- sneed_chucker 3y ago
  Unfortunately the life savings and retirement plans of most of the world's middle class is tied up in it.
  - landemva 3y ago
    The world, or the US? Government pensions are widespead in Europe. And middle class USA savings is paying down their house mortgage.
    - sneed_chucker 3y ago
      What do you think government pensions are invested in?

yeouch 3y ago

How is this sustainable? What is the solution? Austerity? Inflation?

brad0 3y ago
Austerity, taxing the rich, restructure debt, printing money. This video by Ray Dalio explains it much better than I ever could: https://www.youtube.com/watch?v=PHe0bXAIuk0 https://www.youtube.com/watch?v=PHe0bXAIuk0
missedthecue 3y ago
I wish there could be an intelligent conversation about this. I feel like whenever I bring it up, i'm immediately mentally labeled a doomer, prepper, or Gingrich era republican, when the way I see it, this is totally apolitical and just 6th grade math. It's clearly not sustainable to be growing the national debt at 2 or 3 trillion per year, and especially not at 5% interest rates. People bring up Japan as some sort of model that GDP/Debt can go much higher than the US is currently at, while missing that Japan is paying 0.76% on the 10-yr notes today. In many ways, Japan is lucky that their economy is so tepid and impotent because if they had caught the inflation bug like the US, they would have had to raise rates significantly. Needless to say, debt levels at 270% of GDP with 5% rates would cause a fiscal catastrophe in Japan. Their interest payments alone would exceed all government revenue. They would have to cut 100% of government services (military, medical, pensions, administration, legislation, the courts) AND raise taxes, or issue mountains of new debt in some sort of horrible debt spiral until there was no more demand for yen bonds, at which point there would be sovereign bankruptcy I suppose? IMF bailout of Japan? At current rates, US government debt will hit $41 trillion this time next year. It grew $604 billion in the last thirty days, and every bond sold is at 5% interest or more. It's just not something that can be done forever unless the US economy starts growing 10-15% per year, or unless rates can be pushed down to 0% indefinitely with no negative consequences. One thing is for sure, your current tax rate you are paying is as low as it will be for the rest of your lifetime.
marcosdumay 3y ago
It's not unsustainable if that's your question. There's no mechanism that automatically turn this into some clear case of failure. As a consequence, "what is the solution?" will get sidelined by the question of "should we even solve anything?", even though high interest rates are clearly damaging. On the actual question of how to solve it, I don't have any answer. Both austerity and inflation come with side-effects that may or may not increase that rate even more.

bookofjoe 3y ago

>Five Investors on Investing in the 5% World https://www.wsj.com/finance/investing/five-investors-on-investing-in-the-5-world-f8e6e516?mod=hp_lead_pos7 https://www.wsj.com/finance/investing/five-investors-on-inve... https://archive.ph/NCv4a https://archive.ph/NCv4a

boringg 3y ago
Thanks - some interesting perspective.

theanonymousone 3y ago

Sorry for the stupid question. Does 5% mean 5% per year (over ten years), or 5% per 10 years?

naveen99 3y ago
Per year.
- theanonymousone 3y ago
  Meaning a 62% increase of the original investment after 10 years? Isn't that a very good deal?
  - naveen99 3y ago
    It may be. depends where you are on the spectrum of being a saver or a borrower.