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  • Writer's pictureEdward Ballsdon

The deleveraging US consumer and implication for yields


Personal Consumption Expenditure (PCE) makes up approximately 68-70% of the US’s GDP. Probably in large part due to tighter monetary policy and the high cost of debt, it should not come as a surprise that Householder demand for debt is exceedingly low and as a result retail sales remain weak in real terms, or that discretionary item inflation is almost non-existent. It is probably unsurprising too that Credit Card debt growth remains the one robust area of debt growth, or that Credit Card and Auto Loan delinquencies are beginning to rise. This has not translated into problems in the mortgage market, most probably because the overwhelming majority of mortgages have been fixed at much lower rates, shielding mortgagees from higher rates.


All the pieces of the puzzle seem to point to a Household deleveraging cycle, which should be disinflationary in nature and is an important headwind for future growth. Whilst that would normally point to a general loosening of policy, the Fed continues to suggest a tempered set of cuts. Indeed, despite the rally in the front end yesterday,  the market still prices a very restrictive Fed Funds rate of ~4.83% at yearend Dec24.


This research discusses this macro environment of tight policy and weak consumption and its implication for current long end real yields. Furthermore, by analysing recent price action, there can be a conclusion about the likely future direction of yields, the curve and the USD.

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