Steepening Curve - The Only Logical Outcome

By: Sober Look Monday, November 09, 2009 12:06 AM

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Gradually but surely, the US treasury curve continues to steepen. In this environment it's simply inevitable. With the unemployment rate approaching a post Great Depression record, political pressure to keep pumping stimulus will be enormous.

The two ways to finance stimulus spending is via tax increases or by running government deficits. Tax increases however (including state taxes) will exacerbate unemployment further, forcing more budget deficits. The debt supply at the longer end of the curve will continue to grow as the Treasury tries to term out the massive short-term financing they are currently running.

At this stage this steepening seems to be the only logical outcome.

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