Interest Rates Disconnect

Despite recent Fed rate cuts, long Treasury bond yields remain stubbornly high.  The chart below shows 3 month Tbill rates (black line) and 30 year Tbond yields (red line).  The recent disconnect is obvious, though not uncommon in and by itself, as the chart also shows. However, the 2008-15 period was one of ultra low short rates from the Fed's QE to get us out of the GFC.

More recently, short and long rates fell and rose in tandem during the COVID scare.

So, what is happening today? Why the disconnect?

IMHO, two reasons:

1. The market does not really believe that inflation is beat.  President Trump's constantly pressuring the Fed for lower rates does not help, either.

2. Credit concerns about the US.  Ray Dalio, in particular, has been very vocal on the subject.

While everyone is focusing on the stock market and its love affair with AI, this is what AI has to say when asked about Treasury bonds (ChatGPT):

Q - "Are there concerns about the creditworthiness of the US government?"

A - "Yes — there are significant concerns right now about the credit quality (creditworthiness) of the U.S. government, and these concerns are being reflected in how major financial institutions assess U.S. government debt. The gist is that, while U.S. Treasury securities remain one of the most widely held and liquid assets in global markets, there’s a growing debate among investors, policymakers, and rating agencies about how sustainable U.S. public finances are over the long term."

The answer then continues with more specific points and concludes with:

"Bottom line: U.S. government debt is still widely viewed as a relatively safe investment compared with many others, but recent downgrades and ongoing fiscal pressures have raised legitimate concerns about its credit quality among ratings agencies, investors, and economists."

Here's my bottom line: The US federal government has to get its fiscal act together.  Raise taxes, cut spending, stop promising kids' accounts and bonuses, stop announcing defense spending in the hundreds of billions.  But, more than anything... raise taxes.  I know this is anathema to most Americans, but what is the alternative?  After all, other than defense, almost all other spending goes to holy grails like Social Security, Madicare/Medicaid.

Here's some ideas:

1. Fuel tax - bring it in line with Europe, at least partially.

2. Wealth taxes - they won't raise huge amounts, but at least it shows a commitment to take actions.

3. National VAT/consumption tax.  That's the one that will raise the most money, by far.