No recession tradeoff

There is a narrative in the market that postulates the tradeoff between a recession and the interest expense of the U.S. government debt. In order for Mr Bessent to extend durations and lower the cost of debt and therefore improve the deficit, an economic recession will be “desired”, in as much as the long end of the curve is lowered by investors looking for a save haven. That would be the entry point for the Treasury to flood the market with bonds, taking advantage of the demand. But if you look at the chart below, you will see that in order for that narrative to work, the recession needs to be deep and short, investors need to bite the bait and the impact on productivity needs to be low, otherwise the net impact is negative. Using historical data, for a 2% decline in rates, $568Bn will be saved in interest expense, but due to the cost of the recession, the government will collect less taxes and pay more unemployment benefits, to the tune of $1.2Tn loss. We need a better plan.

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