Bend It Like Bessent

The US cannot plausibly grow its way out of rising debt burdens, while higher Treasury yields are making long-term bonds increasingly attractive relative to equities.

• Treasury Secretary Scott Bessent argued that US growth could remain well above 3% and that the debt-to-GDP ratio could fall quickly through fiscal consolidation.
• The Atlanta Fed GDPNow model estimated annualized real GDP growth of 3.7% in the third quarter, but US real GDP growth averaged only 2.5% over the past 10 years.
• The Congressional Budget Office projects the primary budget deficit to average 2.1% of GDP over the next 10 years, pushing federal debt to 120% of GDP by 2036.
• The 10-year Treasury yield reached 5.34%, its highest level since April 2002, and exceeded the S&P 500 trailing earnings yield by more than 150 basis points.
• September US ISM data indicated resilient growth and intensifying price pressures, while fed funds futures continued to price a full 25-basis-point hike to 4.00%-4.25% in December.

Takeaway: Long-term Treasuries look increasingly compelling because high yields offer better compensation than equities and tighter financial conditions may eventually weaken growth and pull real yields lower, although persistent inflation and expected Fed tightening remain risks.