Yesterday House budget reconciliation bill was voted down in the Budget Committee. Same day US was stripped of its last top credit rating by Moody’s Ratings. Timing is perfect. The current draft tax-and-spending bill is expected to add 9 TN USD to the federal debt over the next 10 years. It is a continuation of the messy US fiscal story where tax cuts continue and spending keeps on rising. This loop has now stretched to epic proportions. Net interest payments grew an average of more than 20% per year under Biden, the fastest pace we found since the Nixon administration. Adding up all the legislative and executive actions under the Biden administration, the CRFB estimates they added a net $4.7 trillion of debt over a decade or about 12% worth of est. GDP in 2031. The Congressional Budget Office (CBO) projects that interest payments will total $952 billion in fiscal year 2025 and rise rapidly throughout the next decade, climbing from $1 trillion in 2026 to $1.8 trillion in 2035. Relative to the size of the economy, interest costs in 2026 would exceed the post-World War II high of 3.2 percent from 1991. Such costs would rise to 4.1 percent of gross domestic product (GDP) in fiscal year 2035. In fact, interest payments will exceed the amount that the federal government spends on Medicare (net of offsetting receipts) this year, leaving Social Security the only program larger than net interest. In present too, even if cuts to spending are made, the deficit will almost certainly increase next year because revenue from tariffs will not exceed the cost to extend the TCJA provisions. Despite this (almost certain) move higher of the deficit in coming years, we think that Treasury can still wait until early 26 to increase coupon issuance. Treasury can remain well funded into FY26 by utilizing T-bills. Our own view is that if Treasury is ok seeing a T-bill share of 25% by 2027 in a higher deficit scenario, there is no urgency to increase sizes in the very short-term (ie, this year). But that does not stop an event which was likely to happen many years down the line. We believe there might be a buyer strike in H2CY25 in long end USTs. We expect swap spreads to face downward pressure as yields move northward. We expect the 30-year swap spread to go to 100+ level from the current 86 odd levels. Similarly, the 10-year swap spread can go to 70+ level from the current 53 odd levels. We are now turning bearish on US rates as a whole. We believe it will be worse before it gets better. There might be intermittent sharp relief fall in yields but these will be short lived. Even the SLR relief might be brief and won’t help to assuage the investor interest. We believe that we now see 4.85% on 10yr UST in next few months before we see 4.20. Stop to the view is 4.20 itself. CMP is 4.47.
