Stocks Tumble as Powell Pushes Back Rate Cut Expectations 📉

🐺 Hi pack-mates,

This is Howling Markets, the venture capitalist ready to risk it all to help your knowledge succeed in the financial markets!

Today we will be covering:

• Education: How Are Government Bonds Issued? 🏛️

• US treasury Plans Largest-Ever Debt Auction 💰

• Stocks Tumble as Powell Pushes Back Rate Cut Expectations 📉

• Equity and Debt Markets Daily Update ⚖️

• And more!

Market Watch 👀

How Are Government Bonds Issued?

When thinking about public debt, you have to imagine the government as a company that has both costs and revenues. For a government the revenues come in the form of taxes, whereas costs are the public expenditures, such as healthcare, security, infrastructure, pensions, etc.

When for a given period, the government spends more than what they earn through taxes, it is said that the government is running a “budget deficit”, otherwise when revenues are more than costs, it is called a “budget surplus”

However, when a government is running a budget deficit, they must find a source to finance their spending, and the most common alternative is selling public debt by issuing bonds.

Government bonds can mainly be issued through two different processes: syndicated bond offerings and bond auctions.

A syndicated bond offering consists of hiring a group of investment banks to rally demand for the offering and even underwriting the process. By doing so, the issuer can decide how much debt to sell and the burden to find enough buyers is on the intermediary, which will be obligated to purchase the remaining bonds otherwise.

A bond auction, instead, is the process of auctioning the obligations to potential buyers through which the price will be determined by the bids made during the auction.

Generally, syndicated bond offerings are much more common and chosen both by firms and governments, as opposed to auctions which are mostly adopted by government. This preference comes from the fact that syndicated bond offering grants more decisional power to the issuer.

US Treasury Plans Largest-Ever Debt Auction

Over the past few years, the US government has substantially increased the size of its federal deficit reaching a staggering $1.7 trillion during last year.

Because of this, the US treasury was forced to increase the size of the bond auctions for the maturities of 2 and 5 years over the next three months, expecting to reach a record of $70 billion in bonds sold during April’s auction.

However, on the upside the Treasury has announced that they are not planning to increase the issuance of bonds with maturity longer than 2 years after April, showing some signs of stabilization.

Additionally, it is important to keep in mind that the quantity of debt by itself is not really a worrying data, because if we imagine the government as a company, issuing debt would simply be the equivalent of financing an investment.

As long as the government expenditures are used to generate GDP, it means that the debt is just a healthy investment that will be able to pay itself off. Because of this, the ratio Debt/GDP is more commonly used to judge a country’s quantity of debt.

On the other hand, the current level of this ratio is over 120%, meaning that the US currently has a higher level of debt than GDP.

Considering that a study by World Bank has determined that when this ratio exceeds 77% for a prolonged period of time the country incurs in significant economic slowdowns, this is definitely a data to keep an eye on.

Today’s Howling Question

And now, it is time for our howling question!

In this newsletter we have discussed the different ways in which a government can refinance the national debt, but do you know how much the US national debt currently is?

a) $853 Million

b)  $70 Billion

c) $521 Billion

d) $1.7 Trillion

e) $34 Trillion

Try to answer the question by yourself, and then check the correct answer after the last interesting news!

Stocks Tumble as Powell Pushes Back Rate Cut Expectations

Since the moment the federal reserve made the dovish announcement that they had started discussing rate cuts during the December meeting, the markets skyrocketed and the Feds had to play catch-up to try and limit these expectations.

Before the Feds Minutes were released, some investors expected that the first rate cut could have even happened during Wednesday’s meeting, however, most investors targeted March’s meeting as the most likely option.

During the meeting held on the 31^st of January, Jerome Powell, the Federal Reserve Chairman, stated that the market’s bet on spring rate cut were overeager and that the Fed needs more time to make sure that inflation is at their target level.

Before the meeting the markets had priced in a 60% of a rate cut on the 20^th of March, but now, this percentage has fallen to just over 30%.

As a response, stocks tumbled and bond prices rallied, causing a drop in yields. Let’s analyze Wednesday’s price movements more in depth in the next section.

Equity and Debt Markets Update ⚖️

And now, our daily markets update!

Following Jerome Powell’s remarks, the stock market dropped in fear of a longer than expected period of high interest rates. During Wednesday’s session the SPX fell -1.61%, approaching its previous all-time high and signaling the beginning of a potential healthy retracement.

On the other hand, also the bond yields dropped significantly during the last trading session, losing -2.93%. This is because higher interest rates for longer increased the demand for bonds, increasing their prices, and in turn, decreasing their yields.

Answer

The correct answer is e) $34 Trillion

The United States are the country with the highest national debt, clocking in at over $34 trillion. However, when analyzing this data is always important to also keep in mind GDP and the ratio between the two. Even though the US has a relatively high debt to GDP ratio, there are a handful of countries with an even higher one.

Howl-Worthy Memes 😂

🐺 See you next time!

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