The sobering math of the US bond deficit

 

The US deficit-bond math isn't very attractive. The primary deficit is improving strongly toward levels closer to the 2015-2019 period, but we are not seeing the same improvement in the total deficit, which is now persistently below 5%.

The fiscal primary deficit was 2.6% of GDP for FY2025, but the total deficit was 5.8%. We are away from the pandemic-era extreme deficits, but in a perfect world, some of those extremes should be reversed, not just reduced.  

Bond Vigilantes are Global

 

If the bond vigilantes are back, it is not just in the US. Rates in other G7 countries have been rising, and the US is not the only one. Global bond markets are repricing risk, and there seems to be a common concern about government budget deficits. The problem is that government deficits are high and generally getting higher. The exception is Japan. The problem is that deficits continue to rise because interest rates are also rising, so financing costs strongly drag on any improvement in the budget deficit.

One key reason the US wants to lower interest rates amid persistent inflation is that rising financing costs limit room for further spending increases without larger deficits or higher taxes.  

The bond investors are fully aware of the budget math and they want to be compensated for the added financing risk. 

Know your non-linear VIX behavior

 

This simple chart provides the rules of thumb when thinking about the VIX. The VIX and stock index returns aren’t linearly related, but they show clear non-linearities and breakpoints that investors should know. If the VIX is at extremely high levels, you should buy a return to normality. If the VIX is at extreme lows, it is time to cut positions.

One key issue is that the VIX is not normally distributed; it has a high positive skew. It is more likely that the VIX will stay below 20, with only a few large moves that push it above 40, so it is critical to be ready for extremes.

Druckenmiller - Vigilante or truth-sayer?

I have spent five decades trading on a simple premise: Markets aggregate information no committee possesses, and prices are how that information reaches decision-makers. The long-term Treasury yield is the most important price in the world. It is also the only fiscal disciplinarian the U.S. has left. 

Every basis point of artificial yield suppression is a subsidy to procrastination. Suppressed long rates sugarcoat the interest-cost projections, shrink the apparent urgency, and let incumbents assure voters the debt is someone else’s problem. 

Stan Druckenmiller WSJ opinion piece 

Stan Druckenmiller had a few choice words for Treasury Secretary Bessent's changing buyback plan. The objective of the Bessent plan is not just to provide liquidity to the long end of the yield curve, but to try to bend long-term yields back to lower levels through buybacks that support bond prices. This is an attempt to stop the flood with a bucket. The fundamental problem is the size of government debt, and there is no solution. 

The first quote is spoken like any true trend-followers: market prices aggregate and disseminate information. This is foundational to any market signaling, 

The second quote focuses on the problem: the government just wants to lower the cost of the problem.