In what was a miserable and toxic political campaign, financial issues took a back seat. Cultural name-calling and repeated offensive liar-speak filled the ad space. But the money issues loom large.
About 3 out of 10 approve of POTUS 47. That is a record-low type of number. How it will translate into election results will soon be known.
The “genius” self-image of POTUS 47, now 80, is waning a bit just as we enter the polls. Consider this: when asked about Defense Secretary Hegseth firing Lieutenant General Sylvia over an alleged classified information leak, Trump responded, “She’s got problems. She’s gonna have big problems. She did. We’re very much looking for leakers and ah, she’s going to have big problems. Long-term problems.”
Dear Readers: Lt. General Brett Sylvia, director for strategy, plans, and policy on the Joint Staff that advises the president on military issues, is a man.
Image prompted by Norm Dempsey and rendered by ChatGPT
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Political ads from Republicans seem to avoid the issue of tariffs, a policy disaster that some Republican mega-donors have openly criticized. The ads avoid the Trump deficits, which are setting all-time records. They don’t mention the issues of spreading disease; we listed some RFK Jr. campaign activity yesterday.
In Florida, the revocation of TPS for workers is a big issue that doesn’t appear in Republican ads. And there is little mention of the impact of the Section 338 trade war Trump initiated with Canada, although Florida has been hurt by loss of Canadian tourists.
The list could be much longer.
No one discusses that the cost of credit insurance (CDS) on US Treasury debt is now about ½ of 1%. Most voters don’t see it and few understand it. The damage to federal finances is profound. The shrinkage of foreign institutional holding levels of US debt is worrisome to those who follow it. The impact on our interest rates is serious. Culture war political ads don’t mention it.
Here’s a report about the impact of foreign official choices and how they alter US interest rates.
The decline in foreign official demand has pushed long-term US Treasury yields higher by an estimated 70 to 80 basis points (0.7% to 0.8%) across the long end of the curve. This structural shift is concentrated primarily in intermediate- and long-term notes and bonds (5-year to 30-year maturities), while having a negligible impact on short-term T-bills. [1, 2]
Empirical economic models and Federal Reserve data break down this exact impact on the curve through the following metrics:
1. The Expansion of the “Term Premium”
The most direct metric used to measure this shift is the term premium—the extra compensation investors demand for the risk of holding long-term debt rather than rolling over short-term debt. [1]
- According to the Federal Reserve’s ACM model, the 10-year Treasury term premium has experienced a sharp jump to 80 basis points.
- Analysts directly attribute this rise to a global reckoning, as less price-sensitive foreign central banks step away, forcing the market to price in higher fundamental risk. [1, 2]
2. Supply-Elasticity Impact Matrix
Recent Federal Reserve research quantifying the yield effects of Treasury demand shifts highlights how sensitive the curve has become to changing investor bases: [1]
- The Sensitivity Rule: Because less price-sensitive foreign official investors have pulled back, the Treasury market has become increasingly price-sensitive, relying heavily on hedge funds and private domestic buyers. [1]
- The Math: Economists estimate that for every $100 billion shift in net demand or supply that is not absorbed by traditional long-term holders, 5-year and 10-year yields rise by approximately 3 basis points. With trillions in debt maturing and expanding, this effect compounds rapidly across the curve. [1, 2]
3. Asymmetric Distortion of the Curve Shape
The decline in foreign demand does not affect the curve evenly, leading to specific structural distortions:
Driven by a lack of structural duration buyers, pushing 20-year and 30-year clearing yields to multi-decade highs (e.g., recent 20-year auctions clearing above 5.4%).
4. Higher Volatility and “Tails” at Auction
The loss of foreign allies as a reliable backstop has fundamentally changed Treasury auction dynamics. Indirect bidding (the primary proxy for foreign central bank demand) has steadily dropped. Without this stable cushion, yields on notes and bonds frequently “tail” during government auctions—meaning the debt must clear at a significantly higher interest rate than the market anticipated just to attract private domestic buyers. [1, 2, 3]
Whether this is reflected in the midterms at all is unknown at the time of writing.
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