The year is 1983. The sharp"double-dip" recession of the early '80s has ended, and bond yields--which had finally been"broken" by Paul Volcker's massive rate hikes--are showing signs of breaking out again. The 10-year Treasury jumps from roughly 10% to nearly 12% that summer.Yields continued to rise to a high of nearly 14% the following year.
The Fed's plans for further rate hikes are in some ways the sideshow here. The only way they can bring the Treasury market back into control is to announce they'll start massively buying government debt again. But if they do that, restart"quantitative easing,"They have to close the much-worse-than-expected deficit quickly, to stem the flow of Treasuries coming into a market that has little appetite for them.
Government revenues plunge during recessions, resulting in bigger deficits that add to the debt. The subsequent recovery and rise in yields would once again cause interest payments to doubly grow the deficit, increase the debt pile, and keep us trapped in the so-called"fiscal doom loop."
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