Student loan forgiveness not likely to impact inflation
August 25, 2022
–Yields rose yesterday, TYU2 settled 117-08, down 12 while the cash yield rose 5.8 bps to 3.104%. Euro$ strip down 4.5 to 6 from reds through golds with slight steepening bias. Sept treasury options expire tomorrow; yesterday there was a (new) buyer of 45k TYU 117.75/118.75c spread for 10/64s, settled 10. Powell speech in Jackson Hole is tomorrow, and the market is reflecting expectations, or is at least hedging, that he will emphasize inflation concerns, which would translate to a 75 bp hike at the Sept 21 FOMC. October Fed Funds settled 9701.5, just slightly tilted toward 75 as the exact midpoint between 50 and 75 (specifically indicated by that contract) is 9704.5. Peak open interest in Sept TY options is at the 120 strike in calls, with 97k. The 117.75c strike has 56k open after yesterday’s gain of 49k. On the put side, open interest is diffuse, with peak strike being 116.5p with 69k open (settled 7/64).
–There’s a reasonable amount of press about Biden’s edict to forgive student debt in the aggregate amount of about $300 to $320 billion. I believe that student debt owed to the federal gov’t has been on moratorium since 2020, over two years. According to the Fed’s Consumer Credit report, as of June the Fed’l Govt was a holder of $1.46 trillion of consumer debt, the bulk of which is student loans (Total student debt outstanding is $1.7t). Whatever you think of this jubilee, it’s not likely to add to inflation because the debt wasn’t being serviced anyway. It’s a transfer on the gov’ts balance sheet. At some point the market may question the credit-worthiness of treasuries (call me crazy), or add a little premium to the yield. And that, at the margin, would make other yields increase as well (See mortgage payment chart which shows an increase in mortage payments). Line of the day: “Inflation is so bad it cost the Dems $300bn to buy the midterms.”
–The mortgage chart is self-explanatory. Mortgage rates surged since the end of last year. As did taxes, and now home-heating bills will bite. What does it do for the consumer? Nordstrom (JWN) stock was down 20% yesterday, as the full year outlook was slashed.
