US: Why aren’t yields higher with a projected 4.5% federal budget deficit? - Wells Fargo

Regarding the US federal budget deficit, analysts at Wells Fargo consider that it is not that deficits no longer matter, but rather, favorable circumstances for large-scale sovereign debt issuance exist today. They warn those circumstances will not exist forever. 

Key Quotes: 

“The recent widening in the federal budget deficit and persistently low yields on U.S. Treasury securities have led some observers to question the idea that larger deficits lead to higher interest rates, or even if deficits matter at all. Can the United States really run large budget deficits indefinitely with minimal consequences? In our view, yields on Treasury securities have remained low in the face of bigger deficits for both cyclical and structural reasons.

“On the cyclical side, a dovish turn by the Fed and falling growth/inflation expectations have weighed on yields, dominating the upward pressure from more government debt issuance.”

“On the structural side, the United States enjoys many built-in advantages that make financing large deficits easier. Specifically, the U.S. dollar is the world’s reserve currency, the U.S. economy is the largest in the world and Treasury bills, notes and bonds are the gold standard for liquid, safe assets.”

“Could some of these circumstances change one day, making it much harder to finance structurally large budget deficits? Of course, though when or whether they will is up for debate. In our view, it is not that deficits no longer matter. Rather, favorable circumstances for large-scale sovereign debt issuance exist today, but that does not mean they will exist forever.”

“Budget deficits do not influence interest rates in isolation. Upward pressure on interest rates from budget deficits can, for periods of time, be dwarfed by other factors, such as changing growth/inflation dynamics, dovish monetary policy, robust demand for the asset class and light issuance volumes from other countries.”