Latest / The National Debt Podcast with Fexingo: Treasury, Borrowing, and Long-Term Fiscal Outlook / How The September Jobs Report Reshapes Debt Strategy
Transcript
- Lucas: If walking through the economy with us has made something click on your end, we deliberately don't run ads on these shows. If you want to support that choice, the link is buy me a coffee dot com slash fexingo. Luna: Yeah, it really helps keep the focus on the actual numbers rather than chasing clicks. Lucas: And thanks for listening. Let's jump right into the data that landed this week. We have the September jobs report sitting on our desks now, and the headline number is stark. Nonfarm payrolls increased by just twenty-nine thousand, which is well below expectations, while the unemployment rate ticked up to four-point-two percent. Luna: It feels like a lot of noise around the ADP private sector data showing ninety thousand, but the official government print tells a much colder story about where the economy actually stands. Lucas: Exactly. And the reason I am pulling this out today is not just because the jobs number was soft, but because of what it implies for the thirty-nine point four trillion dollars in federal debt we are carrying as of early April. When labor markets cool this sharply, two things happen simultaneously. First, tax revenues tend to plateau or dip slightly due to lower wage growth. Second, mandatory spending on safety net programs usually ticks up as more people qualify for assistance. Luna: So you are saying the deficit doesn't necessarily shrink just because the economy slows down? It might actually widen if the Fed cuts rates too aggressively to prop up employment. Lucas: Precisely. That is the trap. Look at the Treasury yields from yesterday. The ten-year note is sitting at five-point-two four percent, down from five-point-two nine, but the two-year note dropped harder, from four-point-eight eight to four-point-seven eight. That widened the ten-year two-year yield spread to forty-six basis points. Luna: That inversion is narrowing, which usually signals the market expects the Fed to cut short-term rates faster than long-term expectations adjust. But does that actually help the borrower? Lucas: It helps with refinancing risk in the short term, but it complicates the picture for new issuance. We know the federal deficit for the fiscal year ending in September was negative one point seven seven trillion dollars. That is a massive hole. If the government needs to borrow to cover that gap, and the labor market is weakening, the Federal Reserve might feel pressured to lower the fed funds effective rate, which is currently at three-point seven five percent. Luna: But if they cut rates, they might be fighting inflation again, especially since core inflation held at three-point zero percent in August, which is still above target. Lucas: Right. So we get stuck in a dynamic where the Fed is cautious, keeping rates higher for longer to crush inflation, even though the labor market is faltering. That keeps the cost of servicing that thirty-nine trillion debt elevated. We are seeing the interest on reserve balances sit flat at three-point nine zero percent, which tells us the Fed isn't rushing to change its benchmark despite the weak jobs data. Luna: It seems like the market is trying to price in a recession, but the Fed is pricing in a slow grind toward stability. That disconnect is expensive for anyone holding long-duration debt. Lucas: It is expensive for the government, and by extension, it impacts everyone. Let's look at the broader debt to GDP ratio. As of January first, it was one hundred and twenty-two point six percent. That number is climbing. When you combine a high debt to gdp ratio with sticky inflation and a slowing labor market, you create a perfect storm for bond vigilantes. Luna: I remember we talked about fiscal dominance before, but this feels different. This time, the weakness is coming from the real economy, not just financial engineering. Lucas: It is fundamentally different. In previous cycles, we worried about overheating. Now, we are watching the labor market contract. Men are losing ground specifically, according to recent reports, which suggests structural issues in hiring that aren't just cyclical. This means recovery might be slower, and slower recovery means slower tax revenue growth. Luna: So the government is forced to issue more debt just to maintain current services, pushing yields up because investors demand a premium for holding that paper during a slowdown. Lucas: Yes. And notice the thirty-year yield. It is at five-point six one percent. That is the rate the government locks in for decades. If they keep issuing at those levels, the compounding effect on interest payments becomes unsustainable. We saw the deficit improve slightly from the prior quarter, dropping from negative one point eight one trillion to negative one point seven seven trillion, but that margin is thin. Luna: A four hundred billion improvement sounds good until you realize it barely covers the interest bill for the existing stockpile. Lucas: Exactly. You are running a business where your operating income is barely covering your debt service. That is where we are. The SOFR rate is also relevant here. It is essentially tracking the fed funds rate, sitting around three-point eight eight percent daily. This keeps the short-end of the curve anchored to the Fed's policy, while the long-end reflects the market's fear of fiscal expansion. Luna: So the divergence between what the Fed controls and what the market demands is where the risk lives. Investors are demanding five-point six percent for thirty years because they don't trust the fiscal path, regardless of what the Fed does tomorrow. Lucas: That is the key insight. The Fed can control the overnight rate, but they cannot control the term premium that investors add for holding long-duration sovereign debt. With the debt to GDP ratio already over one hundred and twenty percent, that term premium is likely to stay high. Luna: It makes you wonder if there is any scenario where yields drop significantly without a major fiscal consolidation or a severe recession that forces the Fed's hand completely. Lucas: You would need a significant drop in inflation expectations to bring the ten-year down, or a drastic reduction in the deficit. Given the political reality, neither seems imminent. The labor market softness might force some rate cuts, but if inflation sticks at three percent, the real yield remains positive and attractive for bonds. Luna: So the strategy for investors isn't necessarily to flee bonds, but to understand that the cheap money era is structurally over. The cost of capital has a new floor. Lucas: Correct. And for policymakers, the constraint is real. You cannot simply print your way out of a thirty-nine trillion debt problem when the currency is under pressure from both inflation and growth concerns. The September jobs report is a warning shot that the engine is sputtering, but the fuel tank is empty. Luna: It is a sobering reminder that macroeconomic indicators are interconnected. You can't fix the labor market without addressing the fiscal drag, and you can't fix the fiscal drag without hurting growth further. Lucas: That is the dilemma. We are watching the c p i data closely, and while it cooled to three percent, it hasn't collapsed. The Fed is in a holding pattern. They see the weak jobs report, but they also see sticky prices. So they wait. Luna: Waiting is expensive. Every month they wait, interest payments accumulate. It feels like we are paying a tax for indecision. Lucas: In a way, we are. The market is pricing that indecision into the yield curve. The forty-six basis points spread is a reflection of uncertainty. Until there is clarity on either inflation or employment, that spread will remain volatile. Luna: Do you think the next jobs report will be the catalyst that forces the Fed's hand, or will they continue to ignore the marginal deterioration? Lucas: I think they will continue to ignore it until it becomes undeniable. The bar for action is high because of the inflation legacy. But if we see another month of twenty-nine thousand jobs or worse, the narrative shifts quickly. The market hates surprises, and a rapid deterioration could trigger a flight to quality that actually lowers yields temporarily. Luna: A recessionary rally in bonds. It happens when the Fed cuts rates to save the economy, even if the fiscal situation remains broken. Lucas: Exactly. But that is a dangerous game. Lowering rates to stimulate hiring when the debt burden is already crushing could reignite inflation. It is a tightrope walk with no net. Luna: And the taxpayers are the ones falling off the edge. It is hard to watch the debate play out when the math is this clear. Lucas: It is. And that is why we focus on the numbers. The politics obscure the mechanics. The mechanics tell us that without structural change, the cost of borrowing will only rise. Luna: So we keep an eye on the ten-year yield and the jobs report. Those two metrics will likely dictate the next phase of this economic cycle. Lucas: Agreed. And as we move into October, watch how the bond market reacts to any further signs of labor weakness. The silent killer here isn't just the debt level, it's the speed at which servicing costs consume the budget. Luna: A final thought for the listeners: if you are managing personal debt, this macro environment means your cost of capital is tied directly to their mistakes. Keep an eye on those spreads. Lucas: Well said. We will see where the labor market takes us next month. For now, the numbers speak loudly enough.