DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

Wall Street’s growing interest in socialism reveals something more immediate than an ideological shift. America’s swelling debt burden and battered bond market are threatening to impose even more pain on households while wealthy investors continue enjoying the fruits of elevated stock prices.

Some strategists believe socialist politicians could eventually be forced to confront the debt problem through higher taxes. “A democratic socialist, motivated by hatred of inequality, may be just determined enough to stake his or her political career on the idea that America can finally stomach some tax hikes,” BCA analysts Matt Gertken and Yushu Ma wrote.

Whether voters would tolerate that prescription is unclear. What is already obvious, however, is that bond traders are placing a harsh check on American living standards while the nation’s political and financial leadership remains unable to control federal borrowing.

Investors have spent the summer dumping longer term Treasury debt, sharply steepening the yield curve. Shorter maturity yields generally follow Federal Reserve policy, while longer maturity yields reflect expectations for economic growth, inflation, debt issuance, and confidence in Washington’s fiscal discipline.

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Since June 24, the gap between two year and ten year Treasury yields has widened by nearly 29 basis points, according to FactSet. Most of that move came from the ten year yield, which climbed above 4.7 percent on Tuesday despite the Fed leaving its benchmark rate unchanged.

Yields approaching 5 percent can rattle Wall Street because government bonds begin offering an attractive return without the same risk as stocks. Yet equity investors still have a substantial cushion because the S&P 500 delivered a cumulative 77 percent return over the past three years, with stock ownership heavily concentrated among affluent households.

Main Street has no comparable protection from rising borrowing costs. Treasury yields influence mortgages and other consumer loans, and the typical rate on a thirty year mortgage has now reached 6.75 percent, keeping homeownership beyond the reach of many families.

The latest yield surge has several causes, beginning with the Iran war and its disruption of Middle Eastern energy supplies. With American refineries operating near capacity, diesel reached $5.46 per gallon Tuesday, a punishing increase of 48 percent from one year earlier, according to AAA.

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Technology companies are also borrowing aggressively to finance data centers, artificial intelligence systems, and related infrastructure. That enormous appetite for capital competes directly with Treasury securities, forcing government debt to offer higher yields to attract buyers.

Meanwhile, chip shortages and limitations in the aging electrical grid have driven costs higher. Technology once acted as a powerful force for lower prices, but vast artificial intelligence investment and infrastructure constraints are now contributing to inflation across the broader economy.

Market based expectations for inflation over the next five years remain largely unchanged, according to LSEG data. That persistence is helping establish a floor beneath longer maturity yields and limiting the relief available to consumers.

Fiscal policy remains the deeper vulnerability. “When you have a lot of debt and run unsustainably large budget deficits, you’re extremely vulnerable to any old shock that comes along. It’s not about the shock, but, instead, the mess we are making of fiscal policy on a global scale,” Brooks writes.

The United States is expected to record a budget deficit equal to roughly 6.4 percent of gross domestic product. The Congressional Budget Office recently projected a $2.1 trillion shortfall for the fiscal year ending in September, yet Washington has offered no credible route toward restoring fiscal restraint.

The Trump administration attributes some additional spending to the temporary military demands of the Iran conflict and points to wage gains among lower income workers. Those arguments do not erase the structural imbalance between federal revenue and spending, which continues flooding markets with Treasury supply.

Federal Reserve Chairman Kevin Warsh has acknowledged that financial conditions remain restrictive for ordinary Americans, especially in housing, even as they appear loose for Wall Street. Still, his response to rising yields has hardly reassured borrowers or bond traders.

“At some level, we haven’t done much in 42 days. The markets have done quite a bit,” Warsh said in July. His apparent comfort with the bond market’s tightening encouraged traders to push yields even higher.

Warsh has also criticized the Fed’s massive holdings of Treasurys and mortgage securities, arguing that years of central bank intervention inflated financial assets. Reducing those holdings, however, could increase near term pressure on longer maturity Treasury yields and mortgages by putting more securities into private markets.

The chairman will have another chance to influence expectations when he speaks at the central banking conference in Jackson Hole, Wyoming, on Aug. 28. He could calm the selloff, but the Fed cannot repair a fiscal imbalance created by elected officials unwilling to align spending with revenue.

Bond prices may eventually become attractive enough to lure buyers back, pulling yields lower as they have during previous approaches toward 5 percent. Until then, expensive credit will keep grinding away at household finances and political stability, handing economic radicals an opening that responsible leaders should have closed long ago.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.