U.S. debt is the ‘elephant in the room’ amid bond market rout as Fed-fueled interest costs could drive even larger deficits, analysts warn
The bond market is experiencing a significant selloff driven by high inflation and deteriorating U.S. fiscal health. Analysts at Bank of America warn that unsustainable fiscal dynamics are exacerbating the situation, leading to higher long-term yields. The federal government is expected to issue more debt than anticipated, increasing interest costs and raising concerns about future fiscal deficits.
- ▪Recent weeks have seen a major selloff in the bond market due to high oil prices and inflation.
- ▪Bank of America analysts noted that worsening U.S. fiscal dynamics are a key driver of the selloff.
- ▪The 30-year yield hit 5.18%, the highest since 2007, indicating rising interest costs on U.S. debt.
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Recent weeks have seen a major selloff in the bond market as high oil prices spike inflation, but deteriorating U.S. fiscal health is increasingly a dominant factor, according to analysts at Bank of America.Recommended Video In a note on Friday, BofA announced that the so-called bond vigilantes have returned, referring to traders who protest huge deficits by selling off bonds to push yields higher. That’s as long-term yields hit the highest levels since the Great Financial Crisis on Tuesday due to hot inflation data, lack of a deal to reopen the Strait of Hormuz, strong consumer spending, and continued resilience in the labor market. “In our view, unsustainable fiscal dynamics are compounding with a reflation story, turning a short-term problem into a long-end selloff,” analysts wrote.
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