The US is not having a Liz Truss moment

The Dollar is falling, but that fall is different from the UK's Liz Truss blow-up in 2022

The Dollar has fallen about four percent since election day, even as longer-term US Treasury yields have risen materially. The 30-year yield, for example, has been making headlines because it’s now above 5.0 percent, up from 4.4 percent on election day. This combination of factors - a falling currency even as bond yields are rising - is unusual and is drawing lots of comparisons with the UK’s bond market blow-up in September and October 2022. Today’s post shows why what’s going on in the US now is totally different from that episode. The US is not having a Liz Truss moment.

In September 2022, then UK prime minister Liz Truss presented a mini-budget, the cornerstone of which were large unfunded tax cuts that would sharply widen the deficit. Markets did not like this. The yield on UK government bonds (called Gilts) rose sharply and the Pound fell, telltale signs of a fiscal crisis: investors were exiting the Gilt market and heading for safe havens outside the UK.

The chart shows why the UK Gilt market blow-up in 2022 is totally different from what’s playing out in the US now. It shows the trade-weighted differential of the 30-year US Treasury yield versus other advanced economies (black line). It uses different trade weights to show the same thing for the UK (blue line). It’s important to look at differentials - as opposed to outright yields in the US or the UK - because yields are currently rising everywhere. If there is a fiscal crisis that’s brewing in the US, there should be an idiosyncratic rise in US yields that lifts the differential vis-à-vis other countries.

The UK’s 30-year differential rose from 0.4 percent in August 2022 to 1.0 percent in October 2022, a stunning rise that the UK has yet to recover from. The US differential is currently seeing no such move. Not even close. That means that rising US yields are simply part of the global rise in interest rates and not indicative of US fiscal stress.

Of course, if the US rate differential is stable, that leaves the fall in the Dollar as a puzzle. I’ll zero in on that puzzle and what’s going on with the Dollar in a follow-up post tomorrow.