US Treasury Yield Curve Keeps Inching Up, Just Wait For Fed To Raise Rates (Trouble With The Curve And Federal Financing Of Debt)

Treasury Secretary Janet Yellen is having trouble with the curve (yield curve, that is). It keeps inching up, meaning that Treasury’s cost of debt financing is inching up too.

As Treasury yields keep rising, so does the problem of financing the massive Federal debt load. Here is a chart showing the interest outlays in the Federal budget against the cost of Federal funding at the 10-year and 2-year tenors.

Now, The Fed is predicted to raise their target rate 4 times in 2022 (according to Fed Funds Futures data) and it looks like a whopping 100 basis points (or 1%). Holding the rest of the yield curve constant, this will considerably flatten the 10Y-3M Treasury curve. Resulting in a more expensive refinancing of the Federal Debt load.

If we look at The Fed’s System Open Market Holdings (SOMH), we can see that The Fed’s holdings are primarily Treasuries with non-Treasuries (primarily agency mortgage-backed securities) not maturing (or running off) until 2050.

The majority of The Fed’s COVID expansion was picked-up by The Fed (light blue line).

How about the Treasury Inflation-protected Securities curve? Negative yields across the tenor range.

With Congress trying to spend trillions more (since Build Back Broke failed, Democrats are producing MORE spending legislation with the voting act included, of course), Treasury is going to have progressively more trouble with the (Treasury) curve.