Deficit is destiny: why interest rates need to move higher

Generate demand for your debt 101

Interest rates, especially at the long end of the curve, are moving higher. If you think about it long enough, you can come up with pretty convoluted explanations as to why. But the truth is pretty simple.

There is one forcing function for higher rates. The US is issuing more debt and it needs to find buyers. Higher rates is simply a response to the supply and demand balance for this equation.

From that perspective, rates should continue moving higher. Even if the Fed does nothing. But there is some point at which higher rates won’t do anymore.

---

The Ecoinometrics newsletter gives you insights from crypto and macro data to help you make better investment decisions. 

We spend hours every day gathering data, creating metrics and bringing them to life with data visualizations that allow you to quickly get to the heart of things.

We then distill all that knowledge in each issue of the newsletter with less words and more charts so that you get insights, direct to the point, in five minutes or less.

Join more than 20,000 investors here:

Done? Thanks! That’s great! Now let’s dive in.

P.S. Follow us on X/Twitter or Instagram for daily crypto and macro charts.

---

Why interest rates need to move higher

The takeaway

The US is caught in a bad dynamic:

1. The federal government needs to raise more debt.

2. To find buyers it needs to offer better rates.

3. Which makes it harder for the US to repay its debt.

4. And we are back at step 1.

That means bonds, which have performed like shitcoins since August 2020, are likely to underperform the rest of the market in the near future. 

But what’s more worrying is the endgame. The loop described above cannot continue forever. At some point the debt is no longer sustainable. And the Federal Reserve will need to step in to monetize the debt.

That result in an elevated risk of debasement for the US dollar. 

To be protected against this risk, buying Bitcoin is a good option.

But let’s see what’s the mechanics.

Bonds performance since COVID

For scale: