US Debt Bomb Set to Blow?

Market Sizzle: Wage hikes hit apps, bonds slip, ETFs take over, home prices soar.

It’s payday for food-delivery couriers in New York! With the minimum hourly wage jumping to $19.56, the gig economy just got a major shake-up.

But while delivery drivers celebrate, food-delivery apps are scrambling to adjust fees, leaving customers grumbling and restaurants seeing fewer orders.

US Debt Crisis Looms

The US is set to increase its budget deficit with short-term debt. Aid packages for Ukraine and Israel will push the deficit to $1.9 trillion this year, up from $1.5 trillion predicted in February.

Experts warn this surge will hurt money markets and fight against inflation. Both President Biden and Trump lack strong plans to fix finances. The shift to short-term financing might also disrupt markets.

More student loan forgiveness adds to the deficit but won't impact cash flows right away. To cover the gap, the US will issue $150 billion more debt soon, mostly through Treasury bills. This will raise the total stock of Treasury bills to $6.2 trillion by year-end, causing funding market concerns.

Money market funds still buy Treasury bills, but the Fed, the biggest US debt holder, is pulling back. The last time demand was low, lending rates spiked over 10%. This might happen again, experts warn.

Bond Market Panic Ahead

Global corporate bond spreads are rising for the first time this year. Spreads on junk and investment-grade bonds widened by 10 basis points in June. This makes credit less attractive compared to safer options like Treasuries.

Experts say the macroeconomic environment is stable, but the rising deficit and student loan forgiveness add pressure. The US Treasury plans to issue $150 billion more debt soon. Most of this will be short-term Treasury bills, increasing the total to $6.2 trillion by year-end.

Lower US Treasury yields also contribute to wider credit spreads. Some investors worry about the low yield pickup versus risks. Corporate bonds have outperformed Treasuries this year, and Goldman expects this to continue. Yet, some managers are cautious, favoring other investments.

ETFs Crushing Mutual Funds

ETFs might take over half of US mutual fund assets soon. Investors prefer ETFs for lower costs, better liquidity, and tax efficiency. Mutual funds have lost money for nine of the last ten years, while ETFs gained.

By 2023, mutual funds held $19.6 trillion, but ETFs had $8.1 trillion. Citi estimates $6 to $10 trillion could move from mutual funds to ETFs. The shift is mostly from non-retirement accounts due to tax benefits of ETFs.

Even within retirement accounts, ETFs are growing. They now make up 23% of self-directed assets in 401ks, up from 12% a decade ago. Younger investors also prefer ETFs.

ETFs’ rise poses a threat to mutual funds. Some analysts believe mutual funds could adapt, but the trend is clear: ETFs are on the rise.

Home Prices Crush Buyers

Home prices hit a record high in May. The national median existing-home price was $419,300. That's a 5.8% increase from last year.

High prices and mortgage rates are limiting sales. Home sales dropped 0.7% from the previous month, marking the third monthly decline.

Despite low demand, prices keep rising. High mortgage rates are stopping sellers from listing homes. Sales of expensive homes are also rising, pushing up the median price.

Buying a home is harder for many. The median home price was $270,400 before the pandemic. Now, mortgage rates are over 6%, doubling payments.

Even with challenges, some buyers pay cash, keeping the market competitive. About 28% of homes sold in May were bought with cash.

With fewer buyers, some homes sit longer on the market. Inventory is rising but remains low. This market remains tough for buyers and sellers alike.

Quick Sizzles:

• Shein’s Secret Moves: Shein told US leaders its clothes don’t use Xinjiang cotton. But, they kept quiet publicly to avoid angering China. They are now planning to list their IPO in London.

• Starbucks Slashes Prices: Starbucks is cutting prices to get customers back. They are offering buy-one-get-one-free deals and meal bundles. This is to counter falling sales and high prices.

• Simple Investing Wins: Buying the S&P 500 is beating other strategies. Even complex investment plans can’t keep up. Sometimes, simple is best.

• Hackers Expose AI Flaws: Hackers show how easy it is to trick AI models. They find and share weaknesses in AI from big companies like Meta and OpenAI. This raises security concerns.

That's a wrap for today's Market Sizzle!