Return of the Bond Vigilantes

Net Interest paid by the federal government.

In 1993, the 10Yr Treasury yield surged from a 20-year low of 5.2% to above 8% within a year in what was later coined the Great Bond Massacre. Why? Because the Federal Government was running deficits. Congress and President Clinton got the message and in response balanced the budget and ran a surplus by the year 2000. Are we seeing a re-run of this show in 2023?

As you know, the spotlight has been steadfast on 10Yr Treasury yields in 2023 as the government upsized their bond sales over the summer and reminded the market of their massive 6% budget deficit. FYI, the deficit in dollars is roughly $1.5 trillion in the first 11 months of the fiscal year. You can see in the chart below how the bond market is reacting to this situation and it is very possible we see 5% on 10Yr yields this year.

US Yield Curve by @kiscocap

The Politics

Like in 1993, someone in Washington DC will get the message and point out that a 6% deficit is not sustainable. And it seems that this awakening will begin with a government shutdown on Sunday evening. However, in order to fix the budget a majority of Washington politicians will need to be on the same wavelength and we are far from that right now. This will be the 15th shutdown since 1981 and this one may not last long if the bond vigilantes rise up.

Sending the Message

The rise in 10Yr yields should not be a surprise. In the chart below of the 10Yr (constant maturity yield), there has been a steady rise since the COVID low in March of 2020. Extending this uptrend a bit further gets the 10Yr to a 5-handle and would dramatically flatten the curve. However, this move in yields does resemble an uptrend and that implies long yields will rise into 2024 and surpass 5% with ease.

$TNX chart by @kiscocap.

Equities Are Hanging On

The aforementioned is weighing on the stock market and most corporate CFOs know that they will face refinancing into much higher yields in the coming years (handicapping earnings). The S&P 500 ETF ($SPY) has been down four weeks in a row and is hanging on but at some point the reality of inflation, wage pressures, government shutdown and rising interest rates will get priced into the market.


The momentum indicators are pointing lower and it is likely we test lower levels next week. Stay tuned!

Paul McCarthy of Kisco Capital, LLC

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Paul J McCarthy III CFA

President, Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.