Treasury Yields Jump After Trump Budget Director Admits Interest Rates May "Spike" On Soaring Deficit

In a bizarre warning coming from president Trump's own budget director, one that could accelerate the sharp market selloff which so infurated Trump last week he tweeted about it on several occasions, lashing out against those who sell stocks on "good news" claiming it is a "big mistake", Mick Mulvaney warned that the U.S. will post a larger budget deficit this year and could see a “spike” in interest rates as a result.


White House budget director Mick Mulvaney.

Of course, traders have already experienced the spike, or at least a part of it: it's one of the key catalysts that moved the 10Y from 2.60% to 2.90% since payrolls Friday (coupled with the inflationary impulse from the jump in hourly wages).

Earlier in the day, Mulvaney spoke on “Fox News Sunday,” a day before the White House is expected to release 2019 spending proposals - and after weeks in which financial markets have been spooked by prospects for rising inflation tied to higher deficits and lower taxes.

“This is not a fiscal stimulus; it’s not a sugar high,” Mulvaney said on of the president’s economic program, including the $1.5 trillion tax cut passed in late 2017. “If we can keep the economy humming and generate more money for you and me and for everybody else, then government takes in more money and that’s how we hope to be able to keep the debt under control,” Mulvaney said.

In a separate interview on CBS News’s “Face the Nation,” Mulvaney said rising budget deficits are “a very dangerous idea, but it’s the world we live in.”

As Bloomberg notes, his comment echoed Trump’s Feb. 9 tweet that Republicans “were forced to increase spending on things we do not like or want” to secure Democratic votes for the sharp buildup in military spending wanted by the White House and the Pentagon.

“What they said was they would not give us a single additional dollar for defense unless we gave them dollars for social programs,” he said. “They held the Defense Department hostage, and we had to pay that ransom.”

Shockingly, Mulvaney also acknowledged he would “probably not” have voted for the deal when he served in the House of Representatives and was known as a fiscal hawk. "Keep in mind I’m not Congressman Mick Mulvaney anymore," he said. "My job as the director of the Office of Management Budget is to try to get the President's agenda passed."   

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The next set of numbers - and potential catalyst for further rate upside - will be unveiled on Monday, when Mulvaney's OMB will updating the 2018 budget released last year and its 2019 request, due Monday, in response to the two-year budget deal the president signed into law on Friday morning. That agreement, which ended an hours-long partial government shutdown, will boost government spending by another $300 billion, which will have to be directly funded with more debt. Mulvaney said that in his previous job as a fiscally-conservative congressman representing South Carolina, he would “probably not” have voted for the bill.

The additional spending could increase the deficit to about $1.2 trillion in 2019, and there’s a risk that interest rates “will spike” as a result, Mulvaney said.

And while Mulvaney said that lower deficits are possible over time based on sustained economic growth, in an even more bizarre development, the WaPo reported that Trump’s Budget to be unveiled tomorrow won't project a balance in 10 years, and instead Trump's request will abandon the long-held Republican goal of eliminating deficit in budget projections, even over a decade.

In other words, those concerned that yields may spike further tomorrow - and slam stocks - have good reason: the OMB may unveil the first republican non-balancing budget. Actually, one look at the 30Y Treasury shows that the selling has already begun.