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What Does the Bread-to-Quack Ratio Tell Us About Interest Rates?


Plus, here are three opportunities for action right now.

Long-term interest rates were choppy with no clear trend in 2023 through the end of July but broke to the upside in August. The 30-year Treasury’s yield recently surpassed its 5-year high of 4.2%, with the 10-year also nudging above 4%. Long-term rates have not traded above these levels for an extended period since the financial crisis of 2008-09.

It will be interesting to see whether investors treat this like a ceiling for rates or keep allowing them to rise.

Basic supply and demand for government debt may force a new equilibrium at higher rates, meaning lower bond prices, as the U.S. fiscal deficit will balloon to more than $1.5 trillion in the government’s fiscal year that ends in October. Deficits as a fraction of GDP have averaged 3.6% since 1973. This year’s deficit is likely to be more than 6% of GDP. That is a lot of supply.

There is an old saying in finance, “When the ducks are quacking, feed them.” As long as buyers, both foreign and domestic, maintained a robust appetite for low-yielding debt it made sense to run huge deficits and keep feeding the resulting bonds to the market. We think of our politicians as feckless spendthrifts, but from a certain perspective that is smart business if borrowing is cheap enough. Higher rates are a sign that the ducks are becoming more discriminating. The “bread to quack ratio” is rising.

On the shorter end of the interest rate curve, the Federal Reserve increased its benchmark overnight rate a quarter point to 5.25% on July 27th. The popular view is that rates have likely reached a plateau and will start to come down from here in 2024. That hypothetical interest rate cadence assumes the full effect of recent increases starts restricting measured economic data around the end of this year and that the Fed’s policy goals will thereafter become more balanced between supporting the economy and fighting inflation.

The trouble with predicting future interest rates, even one year out, is that future Fed policy will have to jibe with unpredictable future events. In the press conference following the recent rate announcement, reporters repeatedly tried to bait Fed chief Jerome Powell into endorsing the popular view that rates are destined to fall next. Powell only promised that the Fed’s decisions will depend on future economic data. This was tough talk in the context of the press conference. The Open Market Committee’s actual leanings may not be quite as hawkish as Powell seemed to imply.

Tough talk is another of the weapons in the Fed’s arsenal. In any event, Powell was wise to remind the market that the future is uncertain.

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