Macronomics Chat

"Yesterday, Stanley Druckenmiller argued in the Wall Street Journal that the Treasury should stop trying to hold down long-end yields with buybacks and address the primary deficit instead. The fiscal backdrop to his argument is stark. Since 2006, US gross federal debt has increased by $32 trillion while the annual level of nominal GDP has increased by $19 trillion, see the first chart below. Debt is up nearly fivefold over that period. The economy is up less than 2.5x. Debt is compounding faster than the economy that has to service it, which is why federal debt held by the public has gone from below 40% of GDP to roughly 100% over that period. The outlook offers no relief. The CBO projects that under current policies, debt held by the public will keep climbing from 100% toward 175% of GDP, see the second chart below. The OMB forecasts budget deficits near 5% of GDP over the coming years, on top of a current run rate closer to 6%, see the third chart below. Deficits that size are normal in a recession. These are forecasts for a full-employment economy. The fiscal outlook, a Fed considering a rate hike, and hyperscaler issuance crowding out demand for Treasuries all point the same way. The bottom line for investors is that interest rates are going to stay higher for longer. Or, as Druckenmiller puts it, the long-term Treasury yield is the only fiscal disciplinarian the US has left." - Torsten Slok Apollo

"Dollar Debasement Frees EM Currencies From Treasuries’ Weight US Treasuries and emerging-market currencies are diverging the most in more than four years as higher US yields fail to fuel the dollar’s strength like they once did. A Bloomberg gauge of Treasuries is headed for a quarterly loss as investors sell longer-dated bonds amid concerns over the trajectory of US government debt. MSCI Inc.’s benchmark for emerging-market currencies, meanwhile, is on track for its biggest quarterly gain in more than a year. That’s pushed the correlation between the two to its most negative since the first quarter of 2022, according to data compiled by Bloomberg. Developing nations have attracted global flows this year as investors seek higher yields and diversify portfolios away from dollar-denominated assets. Higher US yields would typically diminish that appeal, but that relationship has broken down as Treasuries come under pressure for reasons other than a hawkish Federal Reserve. Investors increasingly expect the US government to address its debt and deficit burden through inflationary and accommodative policies, such as bond buybacks, that would erode the dollar’s real value. A cheaper dollar makes commodities less expensive for countries with other currencies and thus boost their demand. Commodity-exporting emerging markets, including South Africa, Colombia and Chile, are witnessing the biggest currency gains this month. The dollar-debasement trade leaves emerging markets more attractive than developed markets and commodities more attractive than stocks or bonds, aid Nick Rees, the head of macro research at Monex Europe. “If debasement concerns continue to rise, then that is a constructive environment for commodity currencies more broadly, over and above any rotation away from G10 FX, or the dollar specifically,” Rees said Source: Bloomberg" - Arnaud Boué MD - Julius Baer

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