It was hard to ignore the turn the headlines took as Congress debated the 2026 tax and spending bill that is key to advancing President Trump’s economic agenda. With stunning speed, the “D word” (for Deficit) shifted away from the trade deficit and over to the budget deficits, which have been a consistent feature of the past 25 years. As passed by the House on May 22, the legislative package would increase US debt levels by $3.8 trillion over 10 years; somewhat overlooked is the fact that the bill also contains a provision to raise the debt ceiling by $4 trillion. Last year, 1 in 8 dollars of federal government spending went to interest payments on the debt. (Note: if one owns Treasuries, one is a recipient of those monies.)
The bond market response to the tax and spending debate, fueled by Moody’s downgrade of the US Sovereign credit rating from Aaa to aa1 on May 16, played out in the long end of the Treasury market. Yields on 20-year and 30-year Treasuries rose sharply after the US Treasury sale of 20-year bonds on Wednesday was “soft” (aka “didn’t go well”, “disappointing”, “poorly received”).
Long-term Treasury yields impact a number of critical economic activities, such as home mortgages and business borrowing for capital investment and operations. US existing home sales continue to be in the doldrums due to high prices and high mortgage rates, with sales in April at the lowest levels since 2009. According to the National Association of Realtors (NAR), home sales in April reflect decisions made in February and March. Notably, the NAR says 14% of purchase contracts were canceled in April.
Recent changes in household debt positions are also thought to be a weight on US housing markets. Serious delinquencies (defined as more than 90 days delinquent) increased in every category in the first quarter, led, unsurprisingly, by a sharp increase in student debt delinquencies. Especially interesting is an increase in credit card delinquencies at every income level, including the top 10% income bracket.
Rising debt and even rising delinquencies are not viewed as an immediate problem by a majority of economic observers, largely because of the strength of economic growth and US labor markets. Federal Reserve Chairman Jerome Powell has utilized many recent opportunities to emphasize his view that the economy is strong, and the labor market is “balanced.” A balanced labor market that reduces money policy concerns about upward pressure on inflation is one in which the job openings are roughly equal to the labor available for hire. However, one person’s balance may be another person’s teetering on a knife edge. Should recent downward trends in job openings continue, the labor market may step out of balance in ways that are challenging for household debt management.
