Why Treasury Yields Could Stay Higher for Longer

New York morning trade, we are looking at the 10-year Treasury yields hovering around the 4.7% level now US Treasury Secretary Scott Besson saying that the government has a big toolit to contain yields, and he also emphasized that upcoming debt buybacks could exceed $4 billion for operation.

But at the same time with national debt hitting a record $4 trillion as well as a Wall Street warning that surprise moves that threatened decades.

Of Treasury guidance credibility, investors are questioning what this actually means for borrowing costs and here to break down the fiscal outlook as well as market reaction is Mark Hamrick, founder and chief economic analyst of the Hamrick.

Mark, good morning.

Happy Friday.

Thank you so much for joining us.

Well, it's been quite the roller coaster of a week for global bonds and on the heels of Besson's comments yesterday, he mentioned that big tool kit, but do you think that's enough for bond markets?

Good morning, Remy.

You know, the good thing about a roller coaster in an amusement park is you can get off the ride.

This ride isn't going to end anytime soon.

Those numbers that you just mentioned on the lead-in were important, and they're the numbers to keep in context, but let's just sort of compare them for a moment.

We're talking about $4 billion in buybacks, yet within this context of having the Treasury refund the tariffs that were deemed illegal so far through the end of July, that was a total of $100 billion coming out of the Treasury.

So let's think about that context.

As well that affects the federal debt and of course the other numbers we're watching is what is the federal funds rate stick at along with these moves in long term bond yields and today is Friday as we celebrated the beginning here but next Friday is going to be even more interesting as we get a speech of some kind.

We don't know exactly yet what it will be or whether it will attempt to really move the needle from Fed Chair Kevin.

Yes, you mentioned that roller coaster ride and amusement parks, and I think there's an analogy somewhere, given the fact that we're heading into back to school season and we are going to be back after Labor Day with focus on year end, so there analysts out there that are warning that surprise announcements do indeed break decades of regular as well as predictable Treasury strategies.

So this this loss of predictability actually risk driving the term premium even higher.

What is your take?

Well, I do think you're onto something there, Remy, and that is we know you just take your own pulse these days.

We live in a time of remarkable volatility, remarkable uncertainty, and within that context there's both opportunity but also the downsides of disruption.

So we've had all these supply shocks in the US economy, for example, going back to COVID, the shutdowns and Russia's invasion of.

Ukraine, then the tariffs which are continuing, of course, and the president continues to announce new ways to apply tariffs.

So those things aren't going away and of course the supply shock which is ongoing with respect to the Middle East conflict, which is not a short conflict, it seems to be something that continues.

So far the US has not found a way to resolve this to its own satisfaction, much less.

Many other entities, so I do think the risk is that we're in a higher for longer interest rate environment.

You know, the Fed funds futures do indicate that the Fed will be raising short-term interest rates at some point in the coming months, probably not the next Fed meeting, but there's no, in my mind there's no real high, there's no high degree of certainty that inflation is going to come down in a significant way and more important.

For the Fed, having had this essentially a losing streak of more than 5 years of failing to hit its 2% inflation target, it's now battling to sort of reclaim its credibility under a new chairman, with the old chairman still on the Federal Reserve board.

So this is going to be something that I think is going to set up for some drama here in the coming months, not to mention that once we get into September, we're going to be 2 months out from the midterm elections.

That's something to watch as well.

Mark, and indeed we are counting down to that day in November midterm election day, but before we get to that, I do want to get your perspective on debt in particular national debt.

So we heard earlier this week that the national debt hit a record. $40 trillion this week and not only are we keeping an eye on fiscal spending, but also AIX.

But when it comes to fiscal spending, do you think some of these proposed cuts realistically could save billions of dollars in the near term?

Well, Remember, Elon Musk was going to save us something like $2 trillion.

That didn't happen.

I think what we really need here, Remy, is a concerted effort on the part of members of both parties in the Congress and by extension in the President of the United States to take this matter seriously.

And you also have the sort of correlated problems of Social Security, Medicare, and Medicaid which have funding problems looming very, very soon.

So it's important also to note that this issue about rising yields is not a made in America only phenomenon.

This is a global phenomenon and it occurs at a time when there is an immense amount of corporate borrowing as well.

So go back to basic economics.

When there's so much demand, the price tends to be affected.

In this case, it's the yield, and so this is the environment that appears to be here to stay for quite some time.

Yes, and Mark, finally there's a saying that this time it's different and as you mentioned off the top of the show, this year's Jackson Hole symposium will not be a snooze fest.

So between inflation uncertainty not just in the US but across the world as well as what we're seeing in the US economy with the labor market, what do you think Kevin Warsh should address in his communications?

I know you've been to many a press conference as well as symposium when it comes to the central bank.

Yes, and I plan, by the way, to attend the next Federal Reserve news conference representing the Hamrick brief in mid-September.

So that's something I'm looking forward to.

But I think the main thing that people are looking for is essentially what the questions were at the last news conference, which ultimately very much focused, and I think this is the question the markets are asking is we know inflation is above target.

It's a question whether inflation is going to be really improving in the intermediate term, maybe even the long term.

So what is it that you're waiting for to raise your benchmark interest rate?

And in my mind, the chairman really hasn't given a satisfactory answer to that.

We know that just from the minutes we got this week, a good number of FOMC participants were saying.

It may be inevitable that we do have to raise interest rates, so I think we need to see Warsh at some point walking the walk, not just talking the talk, but in the meantime, a little more talking and certainly no elimination of news conferences in 2027, as is a risk right now.

We need to have a little more clarity, a little more visibility, and not a reduction of either of those two things.

And Mark will definitely be coming to you post the September Fed meeting for your insights as well as analysis, but for American consumers out there who have been on vacation and they're looking at this price action in bonds, what would you say to them?

You know, I would say first of all for savers this is a good opportunity and we don't talk about that enough as a country.

We do talk a lot about the hope that you'll spend because we need to fund the complex that's built on consumer spending.

Walmart raising a white flag about that this week, the capability of American consumers to spend.

But I'm always a fan of watching both sides of the household balance sheet, make sure that.

Spending isn't out of control to know where the money is going, know your numbers, and then also know essentially where your savings is.

And if you don't have sufficient savings, that's something to prioritize.

A higher interest rate environment means that you have the opportunity to capture higher yields.

So maybe this is a time to think about using this interest rate environment to our advantage.

It's not only a detriment.

Well, Mark, always great talking to you.

Thank you so much for joining us on this Friday morning and thank you so much for all of your insight as well as your perspective.

Thank you, Rey.