The National Debt Might Actually Shrink This Quarter

A surge of tax revenue is helping produce an unexpected fiscal event: The U.S. Treasury expects to pay down some of the national debt this quarter.

The Treasury had estimated that it would borrow about $66 billion between April and June, but thanks to strong tax receipts the Treasury now projects that it will pay down the debt by about $26 billion during the period — the first quarterly debt reduction in six years.

Treasury officials cautioned, however, that the final results could be different, especially as the Federal Reserve contemplates selling a portion of its Treasury holdings, a move that could force the Treasury to increase its borrowing.

Still, the “estimate of a paydown in debt will come as a surprise to some on Wall Street,” says Bloomberg’s Liz McCormick, who notes that many banks were projecting net federal borrowing for the current quarter.

10-Year Treasury Yield Hits 3% for First Time Since 2018

The yield on 10-year Treasury notes hit 3% on Monday for the first time since December 2018. While the yield ended the day below 3%, the milestone reached Monday is worth noting because the 10-year yield serves as a key benchmark for a range of borrowing costs, from mortgage rates to student loans. And, of course, rising rates raise the interest cost on the national debt.

The Wall Street Journal provides some context: “Ten-year Treasury yields were well above 3% for most of the past half-century, exceeding 15% in the 1980s, according to Ryan ALM & Tradeweb ICE. But in the past decade they have ended the day above 3% only 64 times, reflecting a period that until recently was marked by sluggish growth and inflation. While today’s bond yields remain low by historical standards, they still represent a remarkable turnaround from the early days of the Covid-19 pandemic, when the 10-year yield dropped as low as 0.5%.”

Quote of the Day

“I liken it to driving in reverse while using the rear-view mirror. They just don’t know what obstacles they’re going to hit.”

– Diane Swonk, chief economist at the consulting firm Grant Thornton, quoted in an Associated Press article about the Federal Reserve’s effort to get inflation under control. The Fed, as we mentioned above, is expected to announce a half-point increase in interest rates this week, as well as an aggressive plan to reduce its balance sheet. But bank officials are sailing through uncharted waters, raising concerns that they could cause a recession as they move to tighten credit throughout the economy.

John Stoltzfus, chief investment strategist at Oppenheimer, said in a note to clients that the Fed faces a tough road ahead. “The global nature of the current inflation outbreak makes the Federal Reserve’s job in reducing US inflation all the more difficult,” he wrote. “With much of the inflationary pressure coming from exogenous factors (global oil prices, supply chain bottlenecks, Zero Covid tolerance in China) the Fed’s use of its main policy lever, raising its overnight borrowing rate to push up borrowing costs for businesses and consumers, gives it limited power to arrest these global inflationary pressures.”

At least one former Fed official thinks a recession looks likely. “The chances of [Fed officials] achieving a soft landing in this cycle is almost zero, because every time they’ve had to push up the unemployment rate in the past, they’ve also ended up in recession,” William Dudley, who led the New York Fed from 2009 until 2018, said Friday.

Opinion of the Day, No. 1: The Pentagon’s Huge Budget Should Cover Biden’s Aid to Ukraine

The Biden administration is requesting another $20 billion in military aid for Ukraine to help the embattled nation fight off Russia’s brutal invasion, a sum that includes funds to cover the cost of repositioning U.S. troops in Europe. Writing at The American Prospect, David Dayen asks why the Pentagon can’t provide those funds out of its already colossal budget:

“There’s certainly a viewpoint that this is a worthwhile price to pay to uphold democratic values and resist the aims of an authoritarian aggressor. ... But whatever your views, I hope one point could be shared by liberals and progressives on both sides of that question: Why should we spend additional money to achieve these goals in Ukraine, after breaking the bank year after year on our own military spending?

“In other words, if you want to offer another $20.4 billion for military purposes for the Ukraine war, why not dip into the existing $776 billion military budget for this fiscal year? That would still leave 97.4 percent of our Pentagon budget untouched, at a time when the U.S. military is waging no other (formal) wars anywhere on the planet. …

“That we need to locate new funding for the $2.6 billion dedicated to funding additional U.S. troop deployments to Europe is indicative of the preposterousness of how we handle military spending. The hundreds of billions annually that makes the U.S. monumentally dominant in terms of military wealth is just the base budget; if anything else has to happen, the Pentagon comes hat in hand looking for more.

“That’s absurd. If the military cannot get by on $776 billion to accommodate moving a relative handful of troops into NATO countries in Eastern Europe, then we should be auditing just what it’s doing with a sum equivalent to the gross national product of Saudi Arabia. The Pentagon budget keeps increasing because the slightest tremor in the world triggers calls for emergency supplemental requests. We should get in the habit of using the existing, astounding military budget when situations like this occur.”