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The Market Impact of Never Ending Waves of Debt

Stock-Markets / US Debt Aug 09, 2009 - 07:09 PM GMT

By: Money_and_Markets


Best Financial Markets Analysis ArticleMike Larson writes: I don’t know if you’re a beach person. But I certainly am. My two girls and I love the sand, the sea, and the sun, and we’re thankful we get to enjoy them all the time here in South Florida.

The best days are those when the waves just keep rolling in. Wave after wave. Set after set. It’s truly a sight to behold — a reminder of the great power of nature.

What’s not so thrilling, though, is to see the same thing happening in the bond market. We are literally seeing a tsunami of Treasury debt issuance the likes of which this country — heck, the world — has never seen!

Just like the waves at the beach, the Treasury's debt keeps rolling in with no end in sight.
Just like the waves at the beach, the Treasury’s debt keeps rolling in with no end in sight.

Every week, we get more Treasury sales …

Every quarter, we get bigger debt auctions …

And every month, we get worse budget news, presaging an even bigger flood of debt down the road.

Case in point: The Treasury Department just said that its latest quarterly refunding auctions of longer-term debt will total $75 billion. The department will auction $37 billion in 3-year notes on August 11, $23 billion in 10-year notes on August 12 and $15 billion in 30-year bonds on August 13.

Treasury also admitted that auction sizes will keep rising in the medium term. And officials said they may get rid of 20-year Treasury Inflation Protected Securities auctions in favor of 30-year TIPS sales.

That’s not all … Treasury now expects the U.S. national debt to bump up against the so-called debt “ceiling” of $12.1 trillion in the final quarter of 2009. Now as we all know, that ceiling is a joke. Whenever we hit it, Congress just increases it!

But the symbolism here shouldn’t be lost on any of us. We are continuing to borrow and spend, borrow and spend, with no short-term or long-term plan on how to get all that debt under control.

The Problem With More Debt … You Have to Pay It Back!

In the case of the U.S. government, our ever-increasing debt load means one of two things is going to have to happen. Either …

  1. Economic growth is going to surge, sending tax revenue through the roof and allowing us to pay off all these bills, notes, and bonds.

OR …

  1. Taxes are going to have to rise sharply to make good on our debts.

Which of those two options is more likely? You guessed it — #2, higher taxes.

One reason is that the government is already starving for revenue. Tax receipts are set to plunge 18 percent this year, the biggest decline since 1932 during the Great Depression. Individual taxes are off 22 percent year-over-year, while corporate revenue has plunged 57 percent.

The policymakers in Washington KNOW this. They KNOW taxes will have to rise. They just haven’t been willing to admit it openly. But even that may be starting to change. Last Sunday, on ABC’s This Week, Treasury Secretary Timothy Geithner refused to rule out middle class tax hikes in an interview with George Stephanopoulos. Here’s the exchange from the show:

STEPHANOPOULOS: “I know you believe that passing health care is central for getting the deficit under control. But independent analysts say even with that you are going to need to find new government revenues. The former deputy Treasury Secretary Roger Altman said it is no longer a matter of whether tax revenues should increase but how. Is he right?”

GEITHNER: “George, it is absolutely right and very important for everyone to understand we will not get this economy back on track, recovery will not be strong enough to sustain unless we can convince the American people that we’re going to have the will to bring these deficits down once recovery is firmly established.”

This past Sunday, Geithner let it be known that the middle class could expect a tax hike.
This past Sunday, Geithner let it be known that the middle class could expect a tax hike.

You can expect more of this type of commentary. Consider it Washington “prepping the battlefield” for the inevitability of what’s coming.

The Market’s Impact Of All This Debt …

There’s a simple reason why I’ve been banging away on this issue for months: It’s having a major market impact.

Rewind the tape to December 5, 2008, and you’ll see I warned in my Money and Markets column that the Treasury market was caught up in a massive bubble. I said that the huge, looming increase in Treasury debt sales would drive prices lower and interest rates higher, and I urged you to take protective steps.

What’s happened in the wake of that piece?

Well, since the peak on December 18, long bond futures prices have plunged more than 26 points. Ten-year Treasury yields have surged to 3.75 percent from 2.06 percent. Those are simply huge moves in the bond market, and proof positive that the bond market knows the U.S. government is spending its way into fiscal oblivion.

I hope that Washington comes to its senses and comes up with some way to get our debt load under control. But nothing I’ve seen to date makes me optimistic. And that means you should continue to play “defense” in your fixed-income portfolio.

Until next time,


P.S. Good news! You can now get instant, short-term updates on the markets I follow by using Twitter. Just go to and subscribe.

If you don’t have a Twitter account, sign up today at and then click on the ‘Follow’ button from to receive updates on either your cell phone or Twitter page.

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