Monday Musings: September 8, 2020

Sep 08, 2020

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Public Trust Credit Team
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As spending keeps growing, the U.S. comes close to hitting an important milestone

Due in part to the Federal response to the COVID-19 pandemic, the U.S. is on pace for one of its highest yearly deficits in history. According to a recent report by the Congressional Budget Office (CBO), the U.S. Federal deficit will hit $3.3 trillion or 16% of GDP this year, representing the largest budget deficit since 1945. Due to increasing spending, the U.S. public debt to GDP is set to hit 98% this year and exceed 100% next year, putting the U.S. on par with heavily indebted countries like France. There is not a broad consensus among economists as to what the long-term effects of the U.S. deficit will be because debt service is relatively cheap at the moment thanks to interest rates being near zero. However, looking to an environment where rates normalize, the U.S. may have to spend substantially more to service and roll its debt, eating into the Federal budget and spending priorities. For now, the U.S. has shown it continues to have ready access to borrowing and has the ability to service that debt, but what the future holds for the country’s elevated debt level remains extremely uncertain.

U.S. residential mortgage market showing no signs of cooling as low interest rates fuel record demand

According to mortgage data collected by Black Knight, U.S. lenders issued $1.1 trillion in mortgage loans between April and June of this year, marking the largest quarter of home loan issuance since the company began tracking issuance data in 2000. Mortgage refinancings, up more than 200% versus the prior year according to the Wall Street Journal, have been the largest contributor to the uptick in home loan issuance as U.S. consumers seek to take advantage of the low interest rate environment. The national average rate for a 30-year fixed mortgage, which tends to move in tandem with the direction of 10-year Treasury notes, sits at 3.06%, its lowest level since September of 2016. The recent boom in demand has led to significant home price appreciation in the U.S. with the S&P Case Shiller 20-City Index coming in at 219.8 in June, the highest monthly level in the index’s history dating back to 1987. With home-purchase demand continuing to accelerate, the housing market is facing quite a paradox as mortgage loan performance has increasingly weakened since the onset of the pandemic. The serious delinquency rate (90 days or more past due) for U.S. homeowners stands at a five-year high at 3.4% as of June and is likely to remain elevated as high unemployment levels are expected to be sustained through the remainder of 2020.
All comments and discussion presented are purely based on opinion and assumptions, not fact. These assumptions may or may not be correct based on foreseen and unforeseen events. The information presented should not be used in making any investment decisions. This material is not a recommendation to buy, sell, implement, or change any securities or investment strategy, function, or process. Any financial and/or investment decision should be made only after considerable research, consideration, and involvement with an experienced professional engaged for the specific purpose. Past performance is not an indication of future performance. Any financial and/or investment decision may incur losses.

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