Lots of Bad Stuff all at once, topped off by Trump’s $1.35 Trillion Free-Money Promise, $5,000 for every adult American, at the worst possible time.

By Wolf Richter for WOLF STREET.

The bond market has been digesting a slew of intense problems, and long-term Treasury yields have already been surging. At the top were: Inflation refuses to go back into the bottle and keeps getting nastier; and the fiscal deficit – projected at 6% of GDP in 2026 for the fourth year in a row despite a growing economy – needs to be funded with new debt sales of $1 trillion every 3 to 5 months.

So this is a precarious situation, and to manage that debt under these conditions would require a steady thoughtful hand at the Treasury Department and in the White House.

But instead, we have at Treasury a hedge fund manager who is playing currency casino one day – “I’m the house now,” he said – and magician the next day, amusing us with his hocus-pocus shows to push down yields, such as the hocus-pocus show about Treasury buybacks.

To his credit, Bessent also talked about focusing on “fiscal consolidation” a few weeks ago, and they were going to work on something, and they were going to come up with something like in a week or so, but that was scuttled, and now any talk of fiscal consolidation would have to wait until after the midterm election.

But that effort at fiscal consolidation got wiped out entirely with a few words by President Trump. In his speech yesterday at the Republican convention in Dallas, he promised $5,000 to every adult American “if the Republicans win” the midterm elections and remain in control of Congress.

So let’s do some math here. There are 269.76 million adults (age 18 and over) in the US, according to the Census Bureau’s latest estimates. So stick with me for a moment. The Republicans win and remain in control of Congress, and the tab comes due: $5,000 for each of the 269.76 million adults, so the tab for that is, let’s see, hmmm, $1.35 trillion with a T that the US government doesn’t have and needs to borrow.

So already, the government needs to sell $1 trillion in new debt every 3-5 months just to fund the current deficits. And now on top of that, it would have to sell $1.35 trillion in additional new debt to fund this “Trump dividend.”

The bond market – the buyers and sellers in the bond market, and the investors sitting on the fence waiting to buy when yields are high enough – can do that math too. And they did.

In addition, the bond market is thinking: Wait a minute, that $5,000 is like all three Covid stimulus checks combined, all at once. When money is free, prices become meaningless. People will just pay whatever. And sellers accommodate them. And inflation takes off. All this free money that the government threw out, first under Trump then under Biden, helped trigger the worst inflation in 40 years, and bond holders got crushed by the loss of purchasing power and the plunge in market value, and now Trump wants to supercharge the free money inflation circus all over again?

So the buyers and sellers in the bond market are thinking: Trump might just blow up the bond market, sacrifice it at the altar of the midterm elections. And the buyers wanted to be paid for this risk, and the sellers tried to get rid of their holdings, and as a result, Treasury prices fell, and yields spiked across the board today, on top of the increases yesterday.

The 10-year Treasury yield spiked by 14 basis points today and by 19 basis points so far this week, to 4.97% at the moment, the highest since the intraday high on October 23, 2023, when it went briefly over 5%. And before then, the highest since July 2007.

This is quite a majestic spike. Yield spikes create demand by pulling investors off the fence. And generally, that’s the end of a yield spike, at least for a while. And it seems, the buyers would start coming out in droves and buy and push the yield back down. That’s what happened last time when it hit 5% on October 23, 2023.

But if too much chaos and uncertainty keep more investors on the fence to watch from a safe distance, the yield could continue to head higher. Bond bear markets are brutal and can last a long time. Investors have learned the hard way to be careful. 5% here we come?

The 30-year Treasury yield jumped by 9 basis points today to 5.37%, the highest since July 2004, having edged past the June 2007 high (5.35%).

At the 30-year Treasury bond auction this morning, it took a yield of 5.308% for the government to sell $22 billion of 30-year bonds, the highest auction yield since August 2001. In the secondary market, yields then continued to rise. There was strong demand at the auction because higher yields attract demand, but that was the yield that it took to sell all $22 billion of bonds.

The current yields may seem attractive in a vacuum, after 14 years of financial repression, and they’re inducing investors to come off the fence.

But to this observer, those long-term yields are just now back to a normal range, after 14 years of financial repression. Inflation is high, and the Fed seems unwilling to tackle it, but seems comfortable with it in the 3% to 5% range as a way to manage the debt (on the theory of letting the economy run hot). The government’s fiscal situation is precarious, with Congress unwilling to deal with it, and with the White House going all out to make it even worse.

The bond market could throw a real hissy-fit if buyers and sellers get frazzled about inflation, the casino-style debt management, the magnitude of the onslaught of supply generated by the horrendous fiscal deficits, and the curveballs that the Administration is throwing at the bond market. To this observer, those risks would require a substantially higher yield to make long-term Treasuries attractive.

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