Will Rising Treasury Yields Trigger a Fed-Treasury Accord 2.0?

The guest estimates that the Treasury must raise about $12 trillion over the next 12 months, including $10 trillion to refinance maturing debt and roughly $2 trillion for the deficit; he says this financing absorbs 40% of global savings versus a pre-COVID mean of 20%, redirecting capital from households, small businesses, and housing. He also estimates that refinancing in the higher-rate regime would add about $126 billion in costs.

The guest links corporate tax provisions that shift spending toward capital expenditures to an ongoing capital-deepening cycle, booming nominal GDP and credit growth, and, among other factors, rising bond yields. In that context, the host says bonds are still competing with other assets and are not yet at fair value, while the guest’s model puts fair value for the long end of the Treasury curve near 6.15%, about 80 to 90 basis points above current yields.

The guest says the current strategy is to grow faster than interest costs to manage the debt, but argues that this tends to fail when production factors run out, potentially leading to what he calls default via debasement. He estimates the Treasury’s near-term financing needs at about $12 trillion and says efforts to cut spending have failed, while expressing uncertainty about avoiding more chaotic alternatives.