A Dubious Milestone

Posted on September 26, 2018 by Gemmer Asset

image_printPrintable Version

Last week we wrote a piece on what has changed since Lehman’s failure. A key point we tried to make (read more here) was both banks and consumers had paid down debt (deleveraged) while the U.S. government had taken up the slack. Debt to GDP in the United States is on track to surpass the level last seen during the New Deal/World War II years, as you can see below.



On this point, we hit a dubious (albeit somewhat arbitrary) milestone this week. For the first time ever, the U.S. government will issue over $1 trillion of debt in September. A trillion here and a trillion there and pretty soon…


Now the $1 trillion number for a single month is a little misleading. Some of this is going to refinance maturing debt. It’s not all new debt. But a lot of it is due to the tax cuts and higher defense spending. Another way to look at it is how much new debt has been issued this year. Again, about $1 trillion, as you can see below.



Roughly half of this new debt is in T-Bills – securities with maturities less than one year. This will naturally increase the government’s interest costs over the coming year if the Fed continues on its path of rate hikes.


All of this comes at the same time the Fed is reducing the size of their balance sheet (quantitative tightening). This essentially means selling both government and mortgage bonds it holds on its balance sheet back into the private marketplace. So far, they have sold off about $145bn this year. This adds to the amount of bonds the market has to absorb.


Basic economics implies that more supply hitting the market (in this case the supply of government bonds), the lower the price. A lower price for a bond means a higher yield.


The $64 trillion dollar question for the markets over coming months and quarters is what will be the impact on the markets from this massive Treasury bond issuance combined with quantitative tightening? The bonds will be sold at some price, but two key questions loom:


  1. How low of a price (high of a yield) will be needed to entice buyers?
  2. What gets crowded out? Is there enough global savings to go around to fund both massive Treasury issuance and the funding demands of other entities? For example, will Argentina be able to sell debt at anywhere near reasonable yields to fund operations, or will they face a funding crisis? On this point there are already mutterings of discontent





Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.


Bookmark and Share