Wolfe Research warns of fiscal pressures ahead of Treasury QRA

Investing.com -- Wolfe Research highlighted concerns about the US fiscal situation as Treasury prepares its Quarterly Refunding Announcement this week, with elevated yields adding pressure to an already strained budget outlook.

The 30-year Treasury yield reached 19-year highs following the July Federal Open Market Committee meeting, creating what the firm described as an unwelcome development for both markets and the federal fiscal outlook.

Federal debt stands at 100% of GDP and continues to rise, while deficits remain above 6% during an economic expansion. Net federal interest expense as a share of GDP has reached historic highs and is projected to keep rising.

If all marketable Treasury debt were refinanced at current yields, the average interest rate paid on federal debt would increase to approximately 4.35% from 3.41%, exceeding the Congressional Budget Office's terminal projection of 3.94% for 2036.

The entire yield curve currently sits above the present average interest rate, meaning each new Treasury issuance pushes interest rates higher than official projections anticipate.

Wolfe Research expressed skepticism that Treasury will signal an increase in coupon issuance at the long end next year during this week's QRA, given the risk of worsening the recent bear steepening. Market consensus expects Treasury to maintain current coupon auction sizes, keeping issuance concentrated at the front end of the curve.

Some estimates suggest that fully unwinding what critics have called "activist Treasury issuance" could push the 10-year yield up by 50 basis points.

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