A projected $500 billion drop in tax revenue means the government will have to sell even more bonds, adding pressure to an already strained market. With the deficit already at $1.8 trillion, this increases bond issuance by roughly 27%, pushing supply up while demand remains uncertain. That could send long-term interest rates higher, especially if buyers demand higher yields to absorb the flood of debt.
The Federal Reserve faces a dilemma. If bond yields spike, the Fed could step in with quantitative easing (QE) to absorb some of the issuance. However, that would run counter to its inflation-fighting stance. Right now, quantitative tightening (QT) has been throttled back to near neutral, but a full pivot to QE would signal a major policy shift. Would Powell really bail out the government by buying bonds at scale? Or would he let market forces push rates higher, allowing them to act as a natural brake on inflation?
Then there’s the White House’s push for lower rates. The key question: is the administration pressuring for short-term rate cuts, which the Fed directly controls, or is it hinting at QE to lower long-term rates? Either way, the Fed has ignored these demands before and may do so again if inflation remains sticky.
Another wrinkle: if foreign buyers step in to absorb these bonds, that could lead to an increase in imports, potentially widening the trade deficit. But those imports would face tariffs, creating another inflationary feedback loop. Higher rates could strengthen the dollar, further complicating trade dynamics.
Given these factors, selling long-term bonds like EDV makes sense if you expect rates to stay higher for longer. The assumption that we’d quickly return to 3% inflation is looking shakier by the day. If the government struggles to fund itself without a Fed bailout, long-term yields could move even higher.