Gnosly

The 10-year Treasury ended September at 5.26%, the highest close since 2007. The 30-year was at 5.59%. Interest on the debt hit $1.27 trillion in the first eleven months of the fiscal year, already more than all of last year. Debt is over $40 trillion. Official forecasts assumed a 10-year average of 4.1%. The market is more than a full point above that.

One framework treats 4.5% as a yellow light, and 5.0% as a red light for the government's finances. On 18 September, the yield was still 4.77%. It then crossed 5% later in the month and finished there.

3 things worth knowing

-1) The government is already using the small tools - From 9 September, the cap on each long-bond buyback rose from $2 billion to at least $4 billion. It is funding itself more heavily with short-term bills, now about a quarter of all the debt, while leaving regular bond auctions the same size. Emerging market debt offices have done both for years. These moves change who holds the paper this quarter. They do not cut the deficit. Spending on Social Security, Medicare, and Medicaid rose from about 6% of the economy in the early 1960s to about 18% by the early 2020s, under both parties. Buying back a few billion of bonds does not reverse that.

2) The open question is whether Washington eventually just caps the yield - If 5% to 6% lasts, and the deficit does not shrink, one option is to peg long-term rates, as the U.S. did in wartime, and Japan did from 2016. It is not the only option. Short-term bills can carry a 5% yield for a while. Japan's cap lost the yen in 2022, and was then dropped. In 2026, Japan reportedly sold more than $90 billion of Treasuries from July to defend the yen. The U.S. wartime cap, 2.5% on the long bond from 1942, ended in 1951, after inflation ran above 8%. Neither case was painless.

3) September did not show the ending people fear - It showed the math that makes a cap thinkable. Gold fell 8.5% in the month. The dollar was near the top of its two-year range. If the authorities had already capped yields and pushed the pain into the currency, the dollar would be weak, and gold would be rising. The opposite happened. What has started is an interest bill growing at rates the official forecast never assumed, on a debt pile no administration has a plan to shrink.

The certain problem is the deficit. The possible fix is a cap on yields, if rates stay here. You do not need to believe in the cap to own less long-term Treasury debt. The deficit is enough.

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