“Would Someone Please Buy US Treasury Bonds?” Janet Yellen #GotBitcoin

Trillion-Dollar Treasury Vacuum Coming For Wall Street Rally. “Would Someone Please Buy US Treasury Bonds?” Janet Yellen #GotBitcoin

* Post-Deal Supply Surge Will Rumble Through Stocks To Credit

* Already-Eroded Liquidity Set To Shrink By $1 Trillion: JPM

With a debt ceiling deal freshly signed into law Saturday by President Joe Biden, the US Treasury is about to unleash a tsunami of new bonds to quickly refill its coffers.

Bitcoin Bonds Are Coming For Wall Street! (Part 1-2)

Bank of Japan’s Policy Shift (Ending Yield-Curve Control) Will Prompt It To Sell Massive U.S. Debt Holdings

Money Supply Growth Went Negative Again In December Another Sign Of Recession

Flight To Money Funds Is Adding To The Strains On Banks

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Federal Reserve Taps BlackRock To Purchase Bonds For The Government

The ‘Cartel’ Is Back: 8 Banks Caught Rigging Government-Bonds

This will be yet another drain on dwindling liquidity as bank deposits are raided to pay for it — and Wall Street is warning that markets aren’t ready.

The negative impact could easily dwarf the after-effects of previous standoffs over the debt limit. The Federal Reserve’s program of quantitative tightening has already eroded bank reserves, while money managers have been hoarding cash in anticipation of a recession.

JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimates a flood of Treasuries will compound the effect of QT on stocks and bonds, knocking almost 5% off their combined performance this year.

Citigroup Inc. macro strategists offer a similar calculus, showing a median drop of 5.4% in the S&P 500 over two months could follow a liquidity drawdown of such magnitude, and a 37 basis-point jolt for high-yield credit spreads.

The sales, set to begin Monday, will rumble through every asset class as they claim an already shrinking supply of money: JPMorgan estimates a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023.

“This is a very big liquidity drain,” says Panigirtzoglou. “We have rarely seen something like that. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.”

It’s a trend that, together with Fed tightening, will push the measure of liquidity down at an annual rate of 6%, in contrast to annualized growth for most of the last decade, JPMorgan estimates.

The US has been relying on extraordinary measures to help fund itself in recent months as leaders bickered in Washington. The measure brokered between Biden and House Speaker Kevin McCarthy limits federal spending for two years and suspends the debt ceiling through the 2024 election.

With default narrowly averted, the Treasury will kick off a borrowing spree that by some Wall Street estimates could top $1 trillion by the end of the third quarter, starting with several Treasury-bill auctions on Monday that total over $170 billion.

What happens as the billions wind their way through the financial system isn’t easy to predict. There are various buyers for short-term Treasury bills: banks, money-market funds and a wide swathe of buyers loosely classified as “non-banks.” These include households, pension funds and corporate treasuries.

Banks have limited appetite for Treasury bills right now; that’s because the yields on offer are unlikely to be able to compete with what they can get on their own reserves.

But even if banks sit out the Treasury auctions, a shift out of deposits and into Treasuries by their clients could wreak havoc. Citigroup modeled historical episodes where bank reserves fell by $500 billion in the span of 12 weeks to approximate what will happen over the following months.

“Any decline in bank reserves is typically a headwind,” says Dirk Willer, Citigroup Global Markets Inc.’s head of global macro strategy.

The most benign scenario is that supply is swept up by money-market mutual funds. It’s assumed their purchases, from their own cash pots, would leave bank reserves intact.

Historically the most prominent buyers of Treasuries, they’ve lately stepped back in favor of better yields on offer from the Fed’s reverse repurchase agreement facility.

That leaves everyone else: the non-banks. They’ll turn up at the weekly Treasury auctions, but not without a knock-on cost to banks.

These buyers are expected to free up cash for their purchases by liquidating bank deposits, exacerbating a capital flight that’s led to a cull of regional lenders and destabilized the financial system this year.

The government’s growing reliance on so-called indirect bidders has been evident for some time, according to Althea Spinozzi, a fixed-income strategist at Saxo Bank A/S.

“In the past few weeks we have seen a record level of indirect bidders during US Treasury auctions,” she says. “It’s likely that they’ll absorb a big part of the upcoming issuances as well.”

For now, relief about the US avoiding default has deflected attention away from any looming liquidity aftershock. At the same time, investor excitement about the prospects for artificial intelligence has put the S&P 500 on the cusp of a bull market after three weeks of gains. Meanwhile, liquidity for individual stocks has been improving, bucking the broader trend.

But that hasn’t quelled fears about what usually happens when there’s a marked downturn in bank reserves: Stocks fall and credit spreads widen, with riskier assets carrying the brunt of losses.

“It’s not a good time to hold the S&P 500,” says Citigroup’s Willer.

Despite the AI-driven rally, positioning in equities is broadly neutral with mutual funds and retail investors staying put, according to Barclays Plc.

“We think there will be a grinding lower in stocks,” and no volatility explosion “because of the liquidity drain,” says Ulrich Urbahn, Berenberg’s head of multi-asset strategy. “We have bad market internals, negative leading indicators and a drop in liquidity, which is all not supportive for stock markets.”

Updated: 10-23-2018

Foreign Buying of U.S. Treasurys Softens, Unsettling Financial Markets

Investor pullback has fueled a bond selloff and shaken a nine-year-long rally in stocks.

The erosion of demand in emerging Asian markets reflects their maturation into more stable economies.

Asian investors are proving less and less eager to buy U.S. government bonds, even as the Treasury Department prepares to sell $1.3 trillion of new debt in the new fiscal year.

Foreigners increased their holdings of Treasurys by $78 billion in the first eight months of this calendar year, according to the Treasury. That is just over half of what they bought in the same period last year.

Holdings have particularly stagnated in a number of emerging Asian economies—including South Korea, Singapore, Thailand and Taiwan—which have prized U.S. government debt as a capital bulwark since the 1997 Asian currency crisis.

Many observers assume the U.S. has no trouble finding demand for its debt in the vast pool of world-wide governments, financial institutions, mutual funds and individual investors who want to own the world’s major risk-free asset. Yet the Treasury is finding fewer buyers in some parts of the world, leaving domestic investors such as mutual funds to pick up the slack.

Much of the drop-off in demand among investors in Europe and Japan is due to the increased cost of protecting themselves from the currency risk of buying dollar-denominated debt. For emerging Asian economies, the reasons are different: Stagnant trade flows and strong reserve balances have sapped their demand for U.S. government debt, according to analysts.

The erosion of demand in these emerging markets also reflects their maturation into more stable economies where investors have a greater array of domestic investments in which to place their money.

“They don’t need to build any more buffers,” said Tim Alt, who manages currencies and bonds with U.K.-based Aviva Investors. They “have an alternative where you don’t have to recycle everything into U.S. Treasurys.”

The lack of demand doesn’t reflect a critique of U.S. fiscal policy but is more likely an indirect byproduct of U.S. trade tensions with China, according to Torsten Sløk, chief international economist at Deutsche Bank Securities.

China is the world’s second-largest economy and the region’s largest trading partner for many countries, so weakness in its currency, the yuan, also has weighed down the currencies of many of its neighbors. In other circumstances, these countries could harbor more demand for U.S. debt, but currently lack a compelling need to buy it, he said.

The Treasury data could understate demand from private investors in Asia, such as insurance companies, because they often make purchases through intermediaries in other countries, according to Brad Setser, an economist at the Council on Foreign Relations. However the most important detail about demand from the region is the lack of intervention by central banks, he said.

Since the start of June, when the U.S. first imposed tariffs on China, Korea’s currency, the won, has dropped 3.3% against the dollar, while the Singapore dollar has declined 2.7%, Thailand’s baht has fallen 2.4% and the Taiwan dollar has slipped 2%. Those moves compare with a 7.1% loss in China’s yuan.

The declines in Asian emerging markets’ currencies have helped their exports remain competitive versus China, but they also have reduced the need for them to buy Treasurys—a popular way for central banks to weaken their currencies against the dollar, Mr. Sløk said.

While it is unclear whether the reduction of Treasury purchases is a deliberate decision or simply free markets at work, the lack of demand shows trade tensions between the U.S. and China have been “spilling over” into the rest of Asia, Mr. Sløk said.

Bond Indexes Bend Under Weight of Treasury Debt

The U.S. government is selling $129 billion of notes this week, up 28% from the same series of auctions a year ago.

The surge in U.S. government borrowing is beginning to warp bond indexes, posing a challenge for investors looking for the best returns when interest rates are rising.

The problem: Treasurys tend to offer investors lower yields and produce weaker returns than other kinds of bonds, such as high-quality company debt or securities backed by mortgage payments.

Yet as the government steps up borrowing to fund last year’s tax cuts, index funds end up holding more Treasurys, squeezing out the securities that pay higher rates of interest.

The U.S. government is borrowing $129 billion this week, up 28% from the same series of note auctions a year ago. The increased borrowing means Treasurys now amount to almost 40% of the value in the leading bond market investment benchmark—the Bloomberg Barclays U.S. aggregate index—which fund managers use to gauge their success. That is up from around 20% in 2006, before the start of the financial crisis.

Some analysts said investors should consider the growing weight of Treasurys in indexes before purchasing mutual funds. Actively managed bond funds have performed better than their index-tracking peers recently, a trend some analysts credit to their efforts to pare back Treasury holdings.

Rising rates erode the value of outstanding bonds, because newly issued debt offers higher payouts. And Federal Reserve officials have penciled in additional increases into 2020.

“The value from active management is going to be more important,” said Kathleen Gaffney, director of diversified fixed income at Eaton Vance , who bought dollar-denominated corporate bonds in emerging markets because U.S. corporate yields remain low by historic measures. “You’re not going to want market risk.”

Through the first six months of this year, active managers topped indexes in five of 14 categories including municipal bonds and short- and intermediate taxable bonds, according to data from S&P Dow Jones Indices.

That is coming off a 2017 in which actively managed funds had their best year since 2012, when active managers beat passive funds in nine of 13 categories the firm then measured.

Pacific Investment Management Co.’s Total Return exchange-traded fund—a smaller, more liquid version of one of the largest actively managed bond mutual funds in the world—has posted a negative return of roughly 1.7% this year, counting price changes and interest payments. The Bloomberg Barclays aggregate index of U.S. bonds has returned minus 2%.

Should yields continue to rise, advocates of active portfolio management say investors would be better served by a human being shielding them from the parts of the bond market most likely to suffer losses versus an index which includes all bonds, without regard to their potential risks.

“This is going to be a test for active managers at how skillful they are at positioning for a higher interest-rate environment,” said Aye Soe, managing director of global research and design at S&P Dow Jones Indices.

It is a situation many expect to persist, with the Treasury Department expected to run trillion-dollar deficits for the foreseeable future. As issuance increases, funds that use the Bloomberg Barclays aggregate index as a guidepost for portfolio composition will wind up owning increasingly large amounts of Treasury debt.

Independent bond analyst David Ader predicts Treasurys will make up half of the U.S. bond market and the indexes that track it by 2028.

Still, because many individuals invest in bond funds to protect against losses in their stock portfolios, there are advantages to indexes that reflect the constituency of bond market borrowers instead of optimizing returns, said Josh Barrickman, who manages Vanguard Group’s bond index fund.

While corporate bonds, for example, offer higher yields than Treasurys, U.S. government debt tends to post high returns during periods when investors shun risk, he said.

The changing composition of bond market indexes can exert a powerful force over what resides within their bond mutual funds without their becoming aware of it, according to fund managers and analysts.

Treasury Department data shows that the category of investors that represents mutual funds bought about one half of the $2 trillion of U.S. government notes and bonds sold at auction last year. That is up from about one-fifth of the $2.2 trillion sold in 2010.

Should slowing growth lead business conditions to worsen, corporations have the option of borrowing less. Not so the U.S. government. Because legally mandated spending on unemployment insurance and other safety net programs tends to rise when growth slows, wider budget deficits and more Treasury debt could ensue.

That means many bond investors could face conditions where there is no alternative to holding a rising share of government debt.

Updated: 10-30-2019

Treasury Exploring New Debt Products, Including 20-Year Bond

Agency looks for new ways to attract investment as analysts see years of growth ahead in federal budget deficits.

The Treasury Department said Wednesday it was considering several possible new debt products as officials seek to find more ways to attract investment as budget analysts expect years of continued growth in federal budget deficits.

The agency is considering adding new bonds with maturities of 20- and 50-years as well as a new floating-rate note linked to the proposed replacement for the troubled London interbank offered rate.

The task of raising money to pay for government operations is taking on added urgency because analysts expect the U.S. to run years of trillion-dollar deficits, even as the economy is in the midst of its longest expansion on record. The government spent nearly $1 trillion more in fiscal 2019 than it took in—the highest deficit in seven years.

Years of rising budget deficits have put the Treasury on track to sell the largest amount of longer-term bonds and notes on record. Government bond analysts said that the agency needed to find new ways to attract investment now, before a potential slowdown in the future overtaxes its ability to efficiently fund operations when rising safety-net spending could lead to greater borrowing needs.

“It seems they’re getting to the upper limits of what they can raise with the current suite of products,” said Gennadiy Goldberg, a government bond analyst at TD Securities. They need both new short- and long-term securities because “deficits are only expected to increase,” he said.

Government deficits have now increased for four years in a row, the longest stretch of U.S. deficit growth since the early 1980s, a period marked by two recessions and a jobless rate near 11%.

The budget gap widened 26% in the fiscal year that ended Sept. 30, to $984 billion from $779 billion deficit the previous year, the Treasury said, as rising government outlays continued to outpace tax collection.

Treasury Secretary Steven Mnuchin said last month the Treasury was “very seriously considering” issuing a 50-year Treasury bond next year, as the administration looks to take greater advantage of low interest rates to slow soaring borrowing costs.

Should the Treasury add a 50-year security, it would be following other governments, including the U.K., Austria and Italy, which have broadened their efforts to attract capital by selling so-called ultralong bonds. Offering a 20-year bond would be a reintroduction of a security last issued in March 1986.

“In the long-run, they urgently need new securities,” said Thomas Simons, a money-market economist at Jefferies Financial Group.

A Treasury advisory committee said it expected to see “meaningful demand” from markets for a new 20-year bond, particularly from corporate pensions and insurance companies, but less so from foreign investors.

The panel said the addition of a 20-year bond “could be a positive addition to Treasury’s issuance tool-kit,” but said more discussion was needed on the expected pricing, size and sustainability of demand before making a final decision.

That group, the Treasury Borrowing Advisory Committee, or TBAC, which is composed of large financial institutions, has tended to be skeptical that selling 50-year bonds would produce lower borrowing costs for the government over time.

Those doubts are outweighed by the risk the Treasury faces from having to continually roll-over a rising quantity of short-term debt, Mr. Simons said.

The government should look to add new securities, particularly if it can broaden its investor base, at a time when the economy is still strong and before a slowdown makes the need to raise money quickly more pressing, Mr. Simons said.

“If they’re under duress and they need them, that’s a significant problem” that could make it more difficult to raise money quickly, he said.

The Treasury also said it was closely monitoring the Fed’s recently announced purchases of Treasury bills following strains in money markets last month.

“The Fed purchases are still in the early stages and at this point we’re monitoring how the purchases program will evolve and any effects on the market,” a Treasury official said Wednesday. “It would be premature to draw any conclusions at this point.”

The Fed began buying short-term Treasury debt earlier this month and said it would continue the purchases—starting at $60 billion a month—into the second quarter of 2020. That marked a turnaround for the central bank, which until August had been shrinking its nearly $4 trillion balance sheet.

The funding pressures related to shortages of funds that resulted from an increase in federal borrowing and the central bank’s decision to shrink the size of its asset portfolio.

The TBAC, warned the purchases could lead to scarcity in the T-bill market if the Treasury doesn’t change its coupon auction sizes, but it recommended keeping issuance unchanged in the current quarter.

The TBAC also said the Fed’s efforts to boost reserves—deposits banks keep at the Fed—should help control money market rates in the near term, but could prove insufficient to prevent year-end funding stress similar to that seen during the fourth quarter in recent years.

The committee expects little or no change in borrowing through the current fiscal year, but said Treasury could need to increase coupon auction sizes in fiscal 2021.

Updated: 11-15-2019

Northern Trust Testing Fractionlized Bonds on Blockchain

Custody bank Northern Trust is testing the trading of fractionalized bonds on a blockchain.

Working with Singapore-based debt markets company BondEvalue, the bank is providing asset servicing for large, high-grade bonds that will be tokenized and divided for retail investors on Hyperledger Sawtooth. These bonds are normally too large for individual investors, but the quality of the bonds is attractive.

The move shows Northern Trust’s continued interest in the technology after it developed then sold its private equities blockchain, which shortens the time to market for new high-tech private equity funds. With $124.3 billion in assets, Northern Trust is the 24th largest bank in the U.S.

“We’re building capabilities we feel will be reusable across multiple asset classes and multiple jurisdictions,” Justin Chapman, global head of market advocacy and innovation research at Northern Trust, said of the new bond pilot.

“Our focus on this initiative is to help bring the exchange to life and then we offer the highest grade asset servicing capability in that digital environment.”

Through the Monetary Authority of Singapore’s Sandbox Express, BondEvalue was given permission to launch a blockchain-based bond exchange in Singapore. Northern Trust will custody tokenized bonds and conduct transactions with the regulator’s oversight.

If the pilot is successful, the bank plans to also participate in the development of BondEvalue’s business model.

Updated: 12-26-2019

U.S. Government Sets Record for Debt Auctions

Total sum to hit $2.55 trillion; share of debt purchased by investors was largest since auction data was made public.

The Treasury Department is scheduled to auction seven-year notes later Thursday, closing the door on a record year for sales of longer-term debt in 2019.

The auction will lift the total of notes and bonds sold by the U.S. government with maturities ranging from two to 30 years to $2.55 trillion, a 26% increase from 2017, when Congress and President Trump agreed to massive corporate tax cuts.

Aggregate demand at U.S. government debt auctions has remained stable in recent years, with investors and bond dealers submitting bids totaling more than twice the amount of notes and bonds for sale. That comes even though yields on the securities have swung from multiyear highs to multiyear lows during the period.

While total demand has remained stable, some of the bidders taking away the securities at auction have changed, according to Treasury data.

The share of the debt purchased by investors was the largest since the government began releasing auction data, totaling about three-quarters of securities sold. Investors—including mutual funds, insurance companies and foreign buyers—submitted bids for more than nine-tenths of what the government raised. Bond dealers, conversely, purchased their smallest share of the debt since data became available.

The amount of government debt is expected to rise, eventually pushing up the size of government debt auctions in coming years, as the U.S. is forecast to run trillion-dollar budget deficits for the next decade, according to the Congressional Budget Office.

The yield on the benchmark 10-year Treasury note was a recent 1.910%, compared with 1.909% Tuesday and 2.684% at the end of last year. The bond market was closed Wednesday in observance of the Christmas holiday.

The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, rose 0.2% Thursday to a recent 90.44.

Updated: 6-4-2023

Biden Debt-Bill Signing Set To Unleash Tsunami Of US Debt Sales

* Treasury Expected To Sell $1 Trillion Or More Of New Debt

* Department Ran Down Cash To Keep Making Federal Payments

President Joe Biden’s signature of legislation suspending the federal debt ceiling has given the Treasury Department the green light to resume net new debt issuance after months of disruption.

Ever since mid-January, when it hit the $31.4 trillion debt ceiling, the Treasury has been using special accounting measures to maintain payments on all federal obligations. There were just $33 billion of those left available as of May 31.

It’s also been running down its cash balance, which dropped below $23 billion on June 1 — a level seen by experts as dangerously low given the volatility in day-to-day federal revenues and payments.

The bill Biden signed Saturday suspended the debt limit until Jan. 1, 2025, allowing the Treasury to rebuild its cash to more normal levels. Early last month, the department had penciled in a $550 billion cash-balance level for the end of June. A widening fiscal deficit also puts pressure on the Treasury to step up borrowing.

Debt auctions are now set to swell. The replenishing process — which could involve an amount well in excess of $1 trillion in new securities — could have unwanted consequences, by draining liquidity from the banking sector, raising short-term funding rates and tightening the screws on an economy that many economists see headed for a recession.

Bank of America Corp. has estimated the issuance wave could have the same economic impact as a quarter-point interest-rate hike by the Federal Reserve.

Auction announcements will offer investors guidance on how quickly the Treasury will go about stepping up issuance.

On Thursday, the department said it planned to bolster the size of upcoming three-month and six-month bill offerings by $2 billion apiece in the coming week. It has also already been ramping up its issuance of four-month debt, its newest bill benchmark.

Four- and eight-week auctions, meanwhile, have room to grow after being reduced to $35 billion each for each weekly issuance cycle.

Treasuries started the week on the back foot with benchmark 10-year yields climbing four basis points to 3.73% in Asia trading.

Extraordinary Measures

Meantime, the removal of the debt ceiling will prompt officials to undo the emergency accounting maneuvers they used to make extra funding available after the Treasury had hit the limit.

The unwinding maneuvers will have no impact on borrowing from the public, however, since the process involves issuing nonmarketable securities to certain internal funds, like the Thrift Savings Plan Government Securities Investment Fund for federal employees.

For the past several months, the Treasury had halted the issuance of those securities while continuing to collect the cash coming in to such funds.

Updated: 7-13-2023

US Racks Up $652 Billion In Debt Costs As Rates Hit 11-Year High

* Higher Interest Rates Mean Bigger Debt Servicing Costs

* US Budget Gap Widens 170% In First Nine Months Of Year

The cost of servicing US government debt jumped by 25% in the first nine months of the fiscal year, reaching $652 billion and contributing to a major widening in the budget deficit.

For the nine months through June, the federal deficit hit $1.39 trillion, up some 170% from the same period the year before, according to Treasury Department data released on Thursday.

The widening shortfall may play into Republican lawmakers’ pressure to curtail federal spending. While the GOP, which controls the House, did a deal with the Biden administration to suspend the debt limit earlier this summer, a fresh fight looms over appropriations for the 2024 fiscal year, which starts Oct. 1.

Higher interest rates have been a key driver of the deficit, with the Federal Reserve boosting its benchmark rate by 5 percentage points since it began hiking in March last year. Five-year Treasury yields are now about 3.96%, versus 1.35% at the start of last year. As lower-yielding securities mature, the Treasury faces steady increases in the rates it pays on outstanding debt.

The weighted average interest for total outstanding debt by the end of June was 2.76%, the highest level since February 2012, according to the Treasury. That’s up from 1.80% a year before, the department’s data show.

Revenue Hit

Still, Treasury Secretary Janet Yellen has played down concerns about higher rates. She has instead flagged that the ratio of interest payments to GDP, after adjustment for inflation, remains historically low.

Another key reason for the widening deficit this year has been a weakening in Treasury revenues, thanks especially to a reduced capital gains tax take. Last year’s slumps in stocks, bonds and other assets meant lower receipts for the government.

Inflation has also boosted a number of government spending items.

Updated: 7-31-2023

Traders Brace For $102 Billion Wave Of Treasury Bond Sales

* Treasury’s Quarterly Refunding Plan Is Due On Wednesday

* Dealers See Series Of Boosts To Debt Sales In Coming Quarters

The US Treasury is set this week to begin a ramp-up in issuance of longer-dated securities that’s likely to stretch into next year, forced by a rapidly deteriorating budget deficit and soaring interest rates.

For the first time since early 2021, the Treasury will boost its so-called quarterly refunding of longer-term Treasuries, to $102 billion from $96 billion, the consensus among dealers suggests.

While down from the record levels hit during the Covid-19 crisis, that’s well above pre-pandemic levels.

Wednesday’s announcement will likely also see debt managers hoist regular auction sizes for securities across the yield curve — with potential exceptions or smaller bumps for notes less in demand. Dealers will be on watch separately for an update on a coming program to buy back older Treasuries.

Public borrowing needs are on the rise thanks in part to Federal Reserve rate hikes that have taken its policy benchmark to a 22-year high — in turn driving up yields on government debt, making it more costly.

The Fed is also shrinking its holdings of Treasuries, obligating bigger government sales of them to other buyers. It all raises the risk of bigger volatility swings when the government auctions its securities.

“There’s just a lot of supply coming,” said Mark Cabana, head of US interest-rate strategy at Bank of America Corp. “We’ve been surprised by the deficit numbers, which are sobering.”

Larger amounts of debt issuance haven’t translated directly into lower prices and higher yields, as the swelling in US debt alongside historically low yields attests over the past two decades.

But bigger auction sizes contribute to the potential for short-term volatility, at a time when banks have diminished appetites for market making. That was on display in a seven-year auction on Thursday that saw buyers demand a bigger discount to absorb the securities.

What has sent yields higher is Fed rate hikes and inflation, a key dynamic widening the budget deficit. The cost of servicing US government debt jumped by 25% in the first nine months of the fiscal year, reaching $652 billion — part of a global phenomenon propelling public borrowing.

Cabana and his team forecast the Treasury will bump up sales of coupon-bearing debt — as notes that pay interest are known — not only this month, but again in the November and February debt-management policy announcements.

The Consensus Of Dealers’ Projections Shows The Following For The Upcoming Refunding Auctions:

* $42 Billion Of 3-Year Notes On Aug. 8
* $37 Billion Of 10-Year Notes On Aug. 9
* $23 Billion Of 30-Year Bonds On Aug. 10

Beyond those sales, most dealers see a lift in issuance across most maturities at a clip of $2 billion each, with many seeing smaller increases for 7- and 20-year Treasuries, which have seen bouts of poor demand.

Some dealers predict the 20-year bond will be singled out for no change in size. That security has been plagued by weak pricing and liquidity since the Treasury relaunched it in 2020.

“There should be well-distributed auction increases across the curve,” besides slightly smaller ones for the 7- and 20-year debt, said Subadra Rajappa, head of US interest rates strategy at Societe Generale SA. “It’s a one-way trajectory now for the deficit over the next 10 years, with them getting larger. Treasury wants to makes sure they are well funded for the next several years.”

The federal deficit hit $1.39 trillion for the first nine months of the current fiscal year, up some 170% from the same period the year before, showcasing the Treasury’s burgeoning funding needs. On Monday, the department boosted its forecast for borrowing in the July-to-September quarter to $1 trillion, from the $733 billion it penciled in in early May.

What Bloomberg Intelligence Says…

“Coupon Treasury issuance may be slowly increased over the next six months.

“Coupon auctions could climb by $1 billion across the curve in August, with monthly auctions rising an additional $1 billion each month through January.”

— Ira F. Jersey And Will Hoffman, BI Strategists

Meantime, the Fed is shrinking its holdings of Treasuries by up to $60 billion a month, by letting securities mature without replacing them.

Fed Chair Jerome Powell last week also signaled that the portfolio runoff could continue at some pace even after policymakers had begun cutting interest rates, suggesting a longer period than many had thought for the so-called quantitative tightening program.

Another dynamic for Treasury’s managers to consider is the share of bills, which mature in short-term spans of up to a year, in overall debt outstanding.

The Treasury Borrowing Advisory Committee, a panel of market participants including buyers and dealers, has long advised a 15% to 20% range for that ratio.

The Treasury lately has been selling a barrage of bills as it sought to rebuild its cash balance in the wake of running it down to dangerously low levels during the partisan battle over the debt limit earlier this year.

Citigroup Inc.’s team said the targeted T-bill share of debt will be among the things they’re looking for this week.

Bills, Buybacks

“Treasury needs to materially increase auction sizes at the November and February refunding,” Citigroup’s Jabaz Mathai, head of Group of 10 rates strategy also said in a note to clients. The later-quarter increases are set to be at “a quicker pace than the post-Covid issuance cycle,” he added.

Another item to watch will be any update to the Treasury’s plans for buybacks, which they first unveiled in May after months of consideration.

One of the aims of buying back older securities and issuing more of the current benchmarks is to help bolster patchy liquidity in the Treasuries market. Another is to smooth out volatility in its issuance of T-bills.

The program is set to start next year, but dealers see the Treasury as still working out the details. The department queried them about again in their pre-refunding survey questions.

US Treasury Boosts Quarterly Borrowing Estimate To $1 Trillion

* Department Had Previously Estimated $733 Billion For Quarter

* Treasury Still Restocking Cash Balance After Debt-Limit Fight

The US Treasury boosted its estimate for federal borrowing for the current quarter as it addresses a deteriorating fiscal deficit and keeps replenishing its cash buffer.

The Treasury Department increased its net borrowing estimate for the July through September quarter to $1 trillion, well up from the $733 billion amount it had predicted in early May.

The new amount, published on Monday, is a record for the September quarter and in excess of what some close watchers of the figure had expected. JPMorgan Chase & Co. had penciled in $796 billion. Lou Crandall at Wrightson ICAP LLC predicted $885 billion.

Part of the higher borrowing estimate is due to a bigger cash balance planned for the end of September. The Treasury bumped that number up to $650 billion, from the $600 billion it had anticipated three months ago. The cash stockpile — known as the Treasury General Account, or TGA — is currently about $552 billion.

Since Congress and the White House agreed to suspend the debt limit in early June, the Treasury has been ramping up its cash balance — which debt managers had run down toward zero as they made good on federal obligations without being able to increase borrowing.

Deficit Dynamics

Bond dealers have foreseen US funding needs rising over the next several quarters thanks to a deteriorating budget deficit and to the Federal Reserve’s shrinking of its holdings of Treasuries — a process that effectively forces the government to sell more to the public.

Jay Barry, head of US government-bond strategy JPMorgan, was among those expecting the Treasury to boost its quarterly financing estimate, based on “the fiscal trajectory, the outlook for the Fed’s balance sheet” and “expectations for Treasury’s cash.”

The Treasury said Monday that $83 billion of the increase in the borrowing estimate for the current quarter was due to projections for weaker revenues and higher spending.

“Extrapolating the current trend, based on historical deficit seasonal trends, would leave the deficit tracking $1.8 trillion,” JPMorgan’s Barry wrote in a recent note. The gap was $1.39 trillion for the first nine months of the current fiscal year.

Meantime, for the October through December quarter, the Treasury said it expects to borrow $852 billion, with a cash balance of $750 billion for the end of the year.

The all-time high for quarterly borrowing of almost $3 trillion was hit in April-to-June 2020, thanks to the pandemic crisis.

The Treasury on Wednesday will announce plans for its so-called refunding of longer-term securities. Dealers expect US debt managers to lift coupon-bearing debt sales across the yield curve — with potential exceptions or smaller bumps for notes less in demand.

Updated: 8-10-2023

US 30-Year Treasury Auction Signals Weak Demand To Wrap Up Week Of Big Sales

* Week Of Big Sales Indicates Market Struggling To Absorb Deals

* US 30-Year Yield Jumps Higher As Auction Trumps Inflation Data

US Treasuries came under renewed pressure, pushing yields higher, as the market struggled to absorb this week’s final leg of new debt sales.

The moves extended a volatile session Thursday, when soft inflation data for July initially pushed yields lower and fueled speculation that the market would easily accommodate the $23 billion auction of 30-year bonds at 1 pm New York time.

But even with the bonds sold for a yield of 4.189%, the highest since 2011, the amount allotted to primary dealers was the largest since February, a sign of weak demand. Afterward, 30-year yields jumped as high as 4.26% late in New York.

The sale was the biggest test of this week’s auctions, when the Treasury sold a combined $103 billion of new 3-, 10- and 30-year debt, because the long maturity securities usually appeal to select investors such as pension funds and insurers.

The size of the 30-year bond sale was $2 billion larger than last new-issue offering in May, and the market expects further increases given the expected deficits the US government is facing.

“It’s a case of refunding digestion,” and with shorter-dated Treasury yields higher, “you are getting paid to keep duration short,” said Gregory Faranello, head of US rates trading and strategy for AmeriVet Securities. He said the sale also reflects weak summer liquidity.

Treasury yields dropped early in the trading day after the consumer price index’s advance was in line with expectations, supporting anticipation that the Federal Reserve is likely done raising interest rates.

Ten-year Treasury yields dropped as much as 6 basis points to 3.94% before reversing course and jumping back to as much as 4.11% in the late afternoon.

“The selloff feels likes a reaction to the weak auction,” said Subadra Rajappa, head of U.S. rates strategy for Societe Generale. “It caught me by surprise. Dealers had to take down a big chunk of the paper. It feels like there’s not enough of real money participation.”

But, she added, “it’s hard to draw a conclusion for an auction in August” when investors leave for vacations.

The post-auction weakness extended across the market, with yields between the five- and 10-year benchmarks higher by 9-10 basis points and at fresh session peaks at late trading in New York. Traders said the mid-section of the Treasury curve was in focus, with trades favoring under-performance in 5-year bonds.

While the bond market initially warmed to the latest CPI report, traders are still pricing in some risk of another quarter-point Fed hike later this year, with swaps for the November meeting showing a 5.42% policy rate. It’s at 5.33% now.

“The market sees the economy is now in a more disinflationary trend, but the labor market is still strong and that will keep the Fed on its toes,” said Michael Pond, head of global inflation-linked research at Barclays.

Updated: 8-11-2023

Treasury Auctions End On A Downbeat Note This Week After Soft 30-Year Sale

‘If we put all these factors into a blender, for the first time in 10 to 15 years they’re all pointing in the same way and that’s pressure on yields regardless of the inflows that come and go,’ said Gregory Faranello of AmeriVet Securities.

The Treasury market ended the week on a somewhat downbeat note after struggling to absorb Thursday’s $23 billion auction of 30-year bonds despite a record pace of investor inflows.

Demand for the auction was described by strategists and traders as “so-so,” “soft” and “weaker-than-expected.” Thursday’s disappointing sale overshadowed July’s consumer-price report and was the main reason that investors and traders sold off long-dated Treasurys that same afternoon.

The selloff in long-dated U.S. government debt extended into Friday — pushing the 10-year yield and 30-year rate to one-week highs of 4.166% and 4.271%, respectively — and comes at a time when Treasurys are on track for what BofA Securities strategists see as a record $206 billion of inflows this year. Greater inflows should be pushing yields lower, not higher, but that’s not happening. Instead, yields are rising anyway.

Demand/supply dynamics in the Treasury market have recently changed and “the balance of power seems to be shifting in favor of higher yields” at a time of “runaway” government deficits and increases in Treasury’s debt issuances, said Marios Hadjikyriacos, a senior investment analyst at Cyprus-based multiasset brokerage XM.

In a note on Friday, the analyst said that the soft 30-year Treasury auction “certainly reinforced this notion yesterday, helping to propel yields higher,” alongside commentary from San Francisco Fed President Mary Daly, who said the central bank has more work to do to get inflation down.

This week’s government auctions were seen as a key test as to whether investors could keep up their demand for U.S. government debt amid a deluge of issuance and worries about the fiscal outlook.

However, liquidity during August tends to be low so Thursday’s poorly received 30-year sale is not necessarily indicative of further trouble ahead, considering Wednesday’s $38 billion auction of 10-year notes and Tuesday’s sale of $42 billion in 3-year notes both went well, according to analysts.

On July 31, the Treasury Department released an eye-popping $1 trillion borrowing estimate for the third quarter, which was followed the next day by Fitch Ratings’ decision to cut the government’s top AAA rating. Worries about the trajectory of U.S. finances then spilled into Thursday’s 30-year bond auction.

“The technical picture of the Treasury market heading into auctions this week was weak, and it’s not terribly good right now in the long end after the 30-year sale,” said Gregory Faranello, head of U.S. rates for AmeriVet Securities in New York. “The auction wasn’t bad, it just wasn’t as strong as the three-year or 10-year sales on Tuesday and Wednesday.”

At a time when the fiscal outlook looks worrisome, Federal Reserve policy makers are raising interest rates and shrinking the central bank’s $8.2 trillion balance sheet.

In other words, the Fed, long seen as an important buyer of Treasurys which isn’t price-sensitive, “has gone away and the buyers left now are more price sensitive,” Faranello said via phone.

“If we put all these factors into a blender, for the first time in 10 to 15 years they’re all pointing in the same way and that’s pressure on yields regardless of the inflows that come and go,” he said, adding that even financial-stability issues in March weren’t enough to keep Treasury rates down.

“Ultimately, the only reasons that yields would go lower from here is weak economic data, which we don’t have, or central bank policy which changes course. The stars are aligning the other way not just here in the U.S., but globally.”

The yield awarded at Thursday’s 30-year auction was higher than what it was going into the competitive deadline, which means demand wasn’t great. In addition, primary dealers were awarded a higher percentage of the allotment than last month, meaning “people on the sidelines didn’t show up or have much interest,” said macro strategist Will Compernolle of FHN Financial in New York. The poor reception “seemed to surprise most people and I think it’s carried on into today.”

On Friday, traders and investors continued to sell off most Treasurys after July’s producer-price report surprised to the upside.

Updated: 9-18-2023

Sub-50 Cent Price On Treasury Bond Underscores Investor Pain

* Long-Term Bonds Sold During Pandemic Hit Hard As Rates Soar

* Positive Convexity Means Debt Could Be Valuable If Yields Fall

Fifty cents on the dollar is a very low price in the world of bonds. In most cases, it signals that investors believe the seller of the debt is in such financial distress that it could default.

So when a US Treasury bond sank below that price Monday, it raised eyebrows. The security, due in May 2050, briefly touched as low as 49 29/32, marking the second time in the past two months it’s fallen below the 50-cent level.

The US, of course, is not in danger of defaulting any time soon. Treasuries are generally considered to be the safest government debt in the world.

What the price does illustrate in this case is the scope of pain inflicted on investors who piled into longer-term debt at rock-bottom interest rates during the pandemic, only to then be caught off-guard when the Federal Reserve carried out the the most aggressive monetary-policy tightening in decades.

The bond due in 2050 has been hit particularly hard, given that its interest rate — 1.25% — is the lowest ever on a 30-year Treasury. Investors got over 4% on 30-year debt issued last month.

“Those bonds have below market coupons and investors need to get compensated for it,” said Nancy Davis, founder of Quadratic Capital Management.

Treasuries maturing in 10 or more years — which have the highest price sensitivity to changes in interest rates, or duration — have slumped 4% this year, following a record 29% plunge in 2022, according to data compiled by Bloomberg.

That’s more than double losses across the broader Treasury market, the data show.

Yields on 30-year bonds hit an all-time low of 0.7% in March 2020, before rising to a 12-year high of 4.47% last month. They hovered 4.4% Monday.

The Treasury initially sold $22 billion of the 2050 securities at about 98 cents (it subsequently did two so-called reopenings, adding to the amount outstanding.) Since the bond’s debut, it’s rapidly lost value as newer ones were sold with higher coupons.

The Fed is the largest investor in the debt, holding about 19%, a legacy of its bond purchasing program known as quantitative easing. Other buy-and-hold investors such as exchange-traded funds, pensions and insurance companies also dominate.

Of course, should a decline in inflation fuel a slide in long-term yields, these bonds would just as quickly turn into an outsize winner versus the rest of the rates curve.

They also have at least one other attractive property for investors. Because of the deep price discount, the securities have what’s known as positive convexity, meaning they rise in price more than they fall for a given change in yield.

For instance, the bonds would surge about 11 cents should their yield decline 100 basis points. For a similar yield increase, the bonds would only fall about 9 cents.

“They have very positive convexity, and that make them very interesting bonds, although liquidity is probably very low,” said Mustafa Chowdhury, chief rates strategist at Macro Hive Ltd.

Updated: 9-20-2023

Treasury Yields Highest Since 2007 After US Debt Hits A Record $33 Trillion

Billionaire investor Ray Dalio cautioned that the US is at the start of a “classic late, big-cycle debt crisis” characterized by a shortage of buyers for its government bills and bonds. Veteran economist Nouriel Roubini has also expressed similar concerns.

Fitch downgraded the US’s long-term credit rating in August, citing a “steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters.”

* US National Debt Has Ballooned To $33 Trillion For The First Time.

* The Federal Government Could Face Another Shutdown By The End Of September.

* Treasury Yields Topped A 16-Year High As The Fed Ends Its Policy Meeting On Wednesday.

Treasury yields hit a 16-year high on Wednesday after the US government’s debt burden hit a record $33 trillion this week.

The surge comes as the Federal Reserve concludes its September policy meeting and is expected to hold interest rates steady.

The Fed’s rate rises in recent months have increased the cost of federal borrowing, with the rate on 10-year Treasurys standing at about 4.36%, up from as low as 0.32% in early 2020.

Federal spending increased by roughly half between 2019 and 2021, which contributed to the debt record, the Treasury Department said on Monday.

It also cited tax cuts, coronavirus stimulus packages and lower tax revenues from high pandemic unemployment as other contributing factors in the spike.

The $1.58 trillion increase since the debt ceiling was lifted in June has left some experts concerned about a potential wider crisis.

These include markets commentator Larry McDonald, who last month warned of a “mind-blowing hole” in the public finances.

Meanwhile, another government shutdown looms unless Congress come to a funding agreement by September 30.

Updated: 10-4-2023

Bond Selloff Threatens Hopes For Economy’s Soft Landing

Growth prospects and concern over government debt are driving long-term interest rates higher.

A sudden surge in long-term interest rates to 16-year highs is threatening hopes for an economic soft landing, all the more because the exact triggers for the move are unclear.

The Federal Reserve has been raising short-term rates for 1½ years. Those increases are designed to push up longer-term bond yields, combating inflation by slowing the economy.

But the speed of the latest jump might be a case of “be careful what you wish for.” It comes as inflation has eased and the Fed has signaled it is nearly done lifting rates.

The yields on the 10-year Treasury note rose 0.119 percentage point Tuesday to 4.801%, the highest level since the subprime mortgage crisis began in August 2007. On Wall Street, the Dow Industrials fell about 431 points, or 1.3%, giving up all their gains for the year. The S&P 500 declined 1.4%. The technology-heavy Nasdaq Composite dropped 1.9%.

If the recent climb in borrowing costs—along with the accompanying slump in stock prices and the stronger dollar—is sustained, that could meaningfully slow the U.S. and global economies over the next year.

The swiftness of the recent rise also increases the risk of financial-market breakdowns.

The likeliest causes appear to be a combination of expectations of better U.S. growth and concern that huge federal deficits are pressuring investors’ capacity to absorb so much debt.

Last year’s increases in long-term Treasury yields were driven by market expectations of higher short-term rates as the Fed tightened policy and by investors’ demands for extra compensation to hold longer-dated assets because of fears of higher inflation.

But neither of those factors appears to be driving higher rates now, which is putting the focus on other influences. Those include reduced demand for Treasurys from foreigners, U.S. banks and domestic portfolio managers who have traditionally purchased government bonds as a hedge against a downturn in stocks and other risky assets.

“It’s perplexing,” said Daleep Singh, a former executive at the New York Fed who is now chief global economist at PGIM Fixed Income. “No fundamental explanation is convincing.”

Treasury Secretary Janet Yellen said Tuesday that it wasn’t clear whether bond yields would settle out at higher levels over the long run. “It’s a great question, and it’s one that’s very much on my and the administration’s minds,” she said during a moderated discussion at the Fortune CEO Initiative conference in Washington.

The lack of an obvious culprit for the latest rise in longer-dated yields suggests that the so-called term premium, or the extra yield that investors demand for investing in longer-dated assets, is rising.

That would mark an abrupt reversal following the low-inflation, low-growth environment that prevailed between the 2008-09 financial crisis and the Covid-19 pandemic.

A higher term premium means even if inflation is under control, borrowers will have to pay more than before because investors want extra compensation for the risks associated with locking up their money for longer periods.

A sustained rise in Treasury yields will be costly for the U.S. government because it would face still-higher borrowing costs on a much larger stock of its debt. The publicly held debt of the U.S. has doubled to around $26 trillion over the past eight years.

The run-up in borrowing costs is sending mortgage rates to 23-year highs, with more lenders now quoting rates above 7.5% for the 30-year fixed loan.

Higher borrowing costs could weigh on stocks and other asset prices, leading to weaker investment, hiring and economic activity.

Since the beginning of August, the S&P 500 has shed nearly 8%, while the U.S. dollar has climbed almost 5% against a basket of foreign currencies.

Economists at Goldman Sachs estimate that if the tightening in financial conditions that began in late July is sustained, it could reduce economic output by 1 percentage point over the coming year.

That could weaken the case for the Fed to raise interest rates later this year.

“We’re going to have to watch it,” Cleveland Fed President Loretta Mester told reporters Tuesday. “Those higher rates will have an impact on the economy, and we just have to take that into account when we’re setting monetary policy.”

The Growth Outlook Brightens

Investors haven’t changed their expectations in recent weeks that the Fed is nearly done raising rates. They see a rising probability, however, that the central bank holds rates at current levels through next year.

Once the Fed cuts rates, they see fewer reductions than they did three months ago.

The current run-up in bond yields gained momentum at the end of July, when the economy began to show signs of reacceleration in the midst of stronger-than-expected consumer spending.

Since then, investors and Fed officials have scrapped their projections that the economy would stumble.

Fed officials have raised their expectations for economic growth next year because “underlying momentum in the economy is quite a bit stronger than we thought…and I think that’s also what market participants are doing,” said Mester.

Fed Chair Jerome Powell acknowledged in September that interest-rate hikes hadn’t slowed the economy as much as anticipated.

Some officials believe the government’s response to the pandemic made the private sector more resilient to the effect of higher interest rates, while others have suggested that interest rates simply haven’t been high enough for long enough to meaningfully dent demand.

In the previous decade, when the economy seemed less responsive to more monetary stimulus, officials concluded that the so-called neutral rate that keeps inflation and unemployment stable over time might have fallen.

Now, some are wondering whether the opposite is occurring, leading to a higher neutral rate.

Investors are puzzling over why consumption has been strong despite the Fed’s aggressive rate increases. If it is because the neutral rate is higher, the Fed will keep rates higher for longer, justifying the recent run-up in yields.

If it is because the traditional lags of monetary policy simply haven’t kicked in, then it could be just a matter of time before the economy slows.

“More people were in the lags camp six months ago, and they’ve slowly thrown in the towel on that one,” said Priya Misra, portfolio manager at J.P. Morgan Asset Management. “They are reassessing how long the Fed will have to keep rates here.”

A New Economic Regime?

Investors are also grappling with the possibility that the global economy faces greater inflation volatility in the coming years. That would be the case if many of the forces that underpinned low inflation and low interest rates after the 2008-09 financial crisis—including globalization, favorable demographics and abundant cheap energy supplies—weaken or go into reverse.

A stronger growth outlook could weaken demand for Treasurys as the supply of securities being issued by the government is rising and as some buyers are stepping back from the market.

The Fed, for example, purchased trillions of securities between 2008 and 2014 and again between 2020 and 2022 to provide additional stimulus after driving short-term rates to zero. Officials believed those purchases would lower long-term yields in part by reducing the term premium.

The central bank ended its purchases in March 2022 and three months later began shedding those holdings passively. It has been allowing up to $60 billion in Treasury securities to mature every month this year without replacing them, which could lift the term premium.

The Fed’s asset holdings have declined by nearly $1 trillion over the past year, to around $8 trillion last week.

“What we’re seeing is a reappraisal of how the bond market prices uncertainty itself,” said Singh. “The compensation required to underwrite potentially the new structural regime with more volatile growth and inflation and fewer predictable sources of demand to absorb record amounts of government debt issuance has clearly risen.”

On Tuesday, Yellen said it was premature to conclude that the U.S. was facing a future of persistently higher interest rates. “The structural forces that led us to believe interest rates would be low—they’re alive and well,” she said.

As the Fed raised rates to tame inflation last year, bonds and stocks both fell, a departure from the traditional pattern in which investors could hedge the risk of a downturn in stocks and other risky assets by purchasing Treasurys.

Many investors had expected that as the Fed neared the end of its rate hikes, the traditional negative correlation between stocks and bonds would return.

The big surprise in the past two months is that this hasn’t happened, in part because the Fed might not cut rates as quickly or as swiftly as investors have anticipated.

A strong September employment report this Friday could add to the bond-market rout by underscoring the economy’s resilience, which would push yields higher. On the other hand, signs of weakness could halt the rise in yields.

“These types of things often take on a life of their own until they self-correct,” either through weaker economic data or “a more sinister mechanism, such as a financial stability scare,” said Singh. “Either of those two developments would mark an inflection point back towards lower yields, but we’re not there yet.”

Long Bonds’ Historic 46% Meltdown Rivals Burst of Dot-Com Bubble

* Duration Exposure Fuels Painful Losses For Long-End Investors

* Thirty-Year Yields Hit 5% Wednesday For First Time Since 2007

Losses on longer-dated Treasuries are beginning to rival some of the most notorious market meltdowns in US history.

Bonds maturing in 10 years or more have slumped 46% since peaking in March 2020, according to data compiled by Bloomberg. That’s just shy of the 49% plunge in US stocks in the aftermath of the dot-com bust at the turn of the century.

The rout in 30-year bonds has been even worse, tumbling 53%, nearing the 57% slump in equities during the depths of the financial crisis.

The extent of the losses is a stark reminder of the risk that comes with piling into longer-dated bonds, where prices are the most sensitive to changes in interest rates.

That was part of the appeal of the securities as the Federal Reserve spent the better part of a decade cutting borrowing costs to near zero.

But as the central bank has carried out the most aggressive monetary-policy tightening in decades to rein in runaway inflation, the mix of historically low starting yields, long-maturity debt and rapidly rising rates has proven to be a painful combination.

“It’s quite something,” said Thomas di Galoma, co-head of global rates trading at BTIG and a four-decade market veteran. “To be honest with you, I had never thought I would see 5% 10-year notes ever again. We got caught in an environment post global financial crisis where everybody just thought rates were going to remain low.”

The current losses in long-maturity debt more than double the next biggest slump in 1981, when then Fed Chair Paul Volcker’s campaign to break the back of inflation drove 10-year yields to almost 16%.

It also surpassed the 39% average loss in seven US equity bear markets since 1970, including last year’s 25% slump in the S&P 500 when the Fed started to lift rates from near zero.

Perhaps the single best example of the staggering pain inflicted on investors is the rout in the 1.25%, 30-year Treasury sold in May 2020. The bond has lost more than half its value since it was issued, trading at around 45 cents on the dollar.

Long-end buyers got a reprieve Wednesday from the relentless selling pressure of recent weeks. Ten-year yields initially climbed as high as 4.88% before a dramatic rally during the US session left them down about six basis points at 4.73%. Thirty-year yields topped 5% before sliding to around 4.86%.

“There’s a lot of portfolio suffering,” said di Galoma. “You’ve seen some big moves, but they don’t seem to last. This time, it’s just continuing. It’s kind of like defying gravity here.”

Updated: 10-5-2023

Bitcoin Enters ‘Quiet Bull Market’ As Safe Haven From Bond Market Turmoil, Analyst Says

Investment research firm ByteTree upgraded bitcoin’s price outlook to “bull” from “neutral” as the crypto benefits as a “safe haven” amid an equity and bond sell-off.

* Bitcoin plunged to $27,300 as its rally above $28,000 proved to be short-lived.

* BTC is in a bull market for defies market rout in equity and U.S. Treasury bond trading, ByteTree CIO says.

Bitcoin (BTC) briefly surged above $28,000 during Thursday U.S. morning hours, then dropped to as low as $27,300 as traders took the opportunity to sell the rally.

The largest cryptocurrency by market capitalization was changing hands at $27,500 recently, flat over the past 24 hours, but still outperforming the wider crypto market.

The CoinDesk Market Index (CMI), which features a broad basket of digital assets, was down 0.3%, while ether (ETH) slid 1.8% over the same period.

“In the near term, I expect the market to sell into this rally,” John Glover, chief investment officer of Ledn, told CoinDesk in an email. “In the absence of new capital flowing into digital assets, I believe that this is what this rally will be: short-lived.”

Glover expects a more durable appreciation will materialize later this year and early next year as bitcoin appears to be finished with its corrective move.

“I do believe that BTC prices will be higher in three months than they are today as technically we’ve completed the sell off and I now look for a sustained rally into Q2 2024,” he said.

Bitcoin As Safe Haven From Surging Rates

Investment research firm ByteTree upgraded its BTC market signal from neutral to bull in a report on Thursday. The crypto’s recent price action has defied a rough period for traditional financial markets, offering a safe haven from a rout in equity and bond trading.

“Bitcoin futures look good, especially when you compare them to the crisis in the bond market,” Charlie Morris, chief investment officer of ByteTree, said in the report. “It is the true safe haven from Uncle Sam’s bonds.”

He pointed out that BTC is beating the U.S. stock market at a time when surging bond yields wreak havoc on traditional markets. When interest rates peak and the bond sell-off ends, BTC will be “off to the races,” he said.

Morris noted that during BTC’s latest corrective move, the crypto held above the key $25,000 level, which capped the price between May 2022 and March 2023.” If we can hold that $25,000 level, which we probably will, BTC is very much in a bull market, albeit a quiet one,” he said.

Even if BTC is shaking off rising yields, it has remained “trapped in its $26,000 to $30,000 cage,” according to Edward Moya, senior market analyst of the Americas at forex trading firm Oanda.

“What is also preventing crypto investors from becoming more optimistic is that the bond market sell-off refuses to end and that will cripple many crypto startups,” he added.

Rising Interest Rates Mean Deficits Finally Matter

Investors ignored deficits when inflation was low. Now they are paying attention and getting worried.

The U.S. has long been the lender of last resort to the world. During the emerging-market panics of the 1990s, the global financial crisis of 2007-09 and the pandemic shutdown of 2020, it was the Treasury’s unmatched capacity to borrow that came to the rescue.

Now, the Treasury itself is a source of risk. No, the U.S. isn’t about to default or fail to sell enough bonds at its next auction. But the scale and upward trajectory of U.S. borrowing and absence of any political corrective now threaten markets and the economy in ways they haven’t for at least a generation.

That’s the takeaway from the sudden sharp rise in Treasury yields in recent weeks. The usual suspects can’t explain it: The inflation picture has gotten marginally better, and the Federal Reserve has signaled it’s nearly done raising rates.

Instead, most of the increase is due to the part of yields, called the term premium, which has nothing to do with inflation or short-term rates. Numerous factors affect the term premium, and rising government deficits are a prime suspect.

Deficits have been wide for years. Why would they matter now? A better question might be: What took so long?

That larger deficits push up long-term rates had long been economic orthodoxy. But for the past 20 years, interest-rate models that incorporated fiscal policy didn’t work, noted Riccardo Trezzi, a former Fed economist who now runs his own research firm, Underlying Inflation.

That’s understandable. Central banks—worried about too-low inflation and stagnant growth—had kept interest rates around zero while buying up government bonds (“quantitative easing”). Private demand for credit was weak. This trumped any concern about deficits.

“We had a blissful 25 years of not having to worry about this problem,” said Mark Wiedman, senior managing director at BlackRock. Today, though, central banks are worried about inflation being too high and have stopped buying and in some cases are shedding their bondholdings (“quantitative tightening”). Suddenly, fiscal policy matters again.

To paraphrase Hemingway, deficits can affect interest rates gradually or suddenly. Investors, asked to buy more bonds, gradually make room in their portfolios by buying less of something else, such as equities.

Eventually, the risk-adjusted returns of these assets equalize, which means higher bond yields and lower price/earnings ratios on stocks. That has been happening for the past month.

Sometimes, though, markets can move suddenly, such as when Mexico threatened to default in 1994 and Greece did default a decade later.

Even in countries that, unlike Mexico or Greece, borrow in currencies they control, interest rates can become hostage to deficits, such as in Canada in the early 1990s or Italy in the 1980s and early 1990s.

The U.S. isn’t Canada or Italy; it controls the world’s reserve currency, and its inflation and interest rates are mostly driven by domestic, not foreign, factors. On the other hand, the U.S. has also exploited those advantages to accumulate debt and run deficits that are much larger than those of peer economies.

There’s not much sign that this has yet imposed a penalty. Investors still project that the Fed will get inflation down to its 2% goal. At 2.4%, real (inflation-adjusted) Treasury yields are comparable to those in the mid-2000s and lower than in the 1990s, when the U.S. government’s debts and deficits were much lower.

Still, sometimes bad news accumulates below investors’ radar until something brings their collective attention to bear. Could a point come when “all the headlines will be about the fiscal unsustainability of the U.S.?” asked Wiedman.

“I don’t hear this today from global investors. But do I think it could happen? Absolutely, that paradigm shift is possible. It’s not that no one shows up to buy Treasurys. It’s that they ask for a much higher yield.”

It’s notable that the recent rise in bond yields came as Fitch Ratings downgraded its U.S. credit rating, Treasury upped the size of its bond auctions, analysts began revising upward this year’s federal deficit, and Congress nearly shut down parts of the government over a failure to pass spending bills.

The federal deficit was over 7% of gross domestic product in fiscal 2023, after adjusting for accounting distortions related to student debt, Barclays analysts noted last week. That’s larger than any deficit since 1930 outside of wars and recessions.

And this is occurring at a time of low unemployment and strong economic growth, suggesting that in normal times, “deficits may be much higher,” Barclays added.

Abroad, fiscal policy has clearly begun to matter. Last fall, a proposed U.K. tax cut triggered a surge in British bond yields; the government scrapped the proposal, then resigned.

Italian yields have risen since the government last week delayed reducing its deficit to below European guidelines. Trezzi said that for the past decade the European Central Bank had bought more than 100% of net Italian government bond issuance, but that’s coming to an end.

Foreign investors, worried about inflation and deficits, have been selling Italian bonds, while Italian households have been buying, Trezzi said. “With a weakening economy, it is unclear for how long…households can offset the selloff of foreigners.”

Investors looking for U.S. political will to rein in deficits would take note that both former President Donald Trump and President Biden, their parties’ front-runners for the 2024 presidential nomination, have signed deficit-busting legislation and that both of their parties have pledged not to cut the two largest spending programs, Medicare and Social Security, or raise taxes on most households.

They would also notice that the Republican speaker of the House of Representatives was just ousted by rebels in his own party because he had passed a bipartisan spending bill to prevent the government from shutting down.

True, the rebels wanted less spending. But shutdowns, Barclays noted, represent “erosion of governance.” This isn’t how a country trying to reassure the bond market acts.

Fed’s Bid To Avoid Recession Tested By Yields Nearing 20-Year Highs

* Long-Term Real Rates Have Hit Levels Rarely Seen In 20 Years

* Policymakers Haven’t Taken Chance To Push Back: Ex-Official

The Federal Reserve may be putting its hoped-for soft landing of the economy at risk by tacitly accepting a run-up in long-term interest rates to the highest levels since 2007.

The surge — 10-year Treasury yields rose more than half a percentage point the past month to surpass 4.7% — heightens the danger in the near-term of a financial blowup akin to the regional bank breakdown in March.

Longer run, it threatens to undercut the economy by markedly raising borrowing costs for consumers and companies.

“Ultimately, the feedback effect starts to fuel fears that you’re going to have a hard landing,” said R.J. Gallo, a senior portfolio manager for Federated Hermes, with about $669 billion in assets under management.

What may have a particularly strong impact is the rise in so-called real rates, which remove the impact of inflation. Yields on 10-year inflation-linked Treasuries have soared in recent weeks to levels rarely seen over the past two decades.

Fed leadership has so far not shown much, if any, inclination to resist the rise in long-term rates. While New York Fed President John Williams suggested last week the US central bank may be finished raising rates, he also said policymakers would keep them high “for some time” to bring inflation down to their 2% goal.

“Fed officials have had a chance at various appearances — and they’ve not really taken that opportunity to push back against this,” former Vice Chair Richard Clarida said on Bloomberg Television on Wednesday.

The rise in yields “actually does some of the Fed’s job for it” by slowing economic growth and helping to contain inflation, added Clarida, who is now a global economic adviser for Pacific Investment Management Co.

For her part, Cleveland Fed President Loretta Mester said Thursday officials are watching the rise in yields, though adding that it’s not clear that the increase would be sustained.

The danger is the leg up in long-term rates does more damage than the Fed expects. The collapse of Silicon Valley Bank in March came in the wake of a rise in bond yields that was partly driven by tough talk on Fed policy by Chair Jerome Powell.

Other Headwinds

“There’s a potential near-term disruptive effect to worry about,” said Bruce Kasman, chief economist for JPMorgan Chase & Co.

The rise in rates is also occurring at a time when the economy is already facing a number of headwinds — from a resumption of student loan payments to a strike by autoworkers.

Indeed, Bloomberg Economics chief US economist Anna Wong says the US economy is probably on the verge of tipping into a recession.

Market participants have identified a variety of triggers for the surge in yields — which moderated slightly Wednesday. Among them: investor concern about burgeoning US budget deficits, slackening demand for Treasury securities from foreign investors including China and expectations that Japan will exit its ultra-loose monetary policy in coming quarters.

Some economists and investors have also cited what they see as a muddled message from the central bank regarding its stance on real interest rates.

Real Rates

“We’ve gotten conflicting signals from the Fed,” MacroPolicy Perspectives LLC founder and former central bank economist Julia Coronado said. In an environment where bond yields were already rising, that “basically just gave the market permission to keep marching higher.”

What’s puzzling investors is how exactly policymakers define real rates. Fed officials have sometimes cited gauges that are based on past inflation and sometimes those tied to prospective inflation rates.

The difference can be critical in determining the future path of Fed policy. Williams in August suggested that the Fed would cut rates

next year in tandem with an expected fall in inflation. The aim, he explained, would be to prevent real rates from rising and policy from becoming more restrictive.

But Cleveland’s Mester, who doesn’t vote on monetary policy decisions this year, suggested on Tuesday that’s not inevitably so.

“Real rates should be based on expected inflation, not necessarily current inflation,” she told reporters.

In that case, a slowdown in inflation wouldn’t automatically call for a reduction in Fed rates, unless also accompanied by an easing in expectations. The Fed’s preferred gauge of core inflation, which strips out food and energy costs, was 3.9% in August.

By comparison, a benchmark for expected inflation derived from bond market pricing indicates about a 2.5% pace over the longer term.

Neutral Rate

Powell has also muddied the waters about the so-called real neutral rate of interest — the equilibrium rate that neither spurs nor retards economic growth.

Speaking to reporters on Sept. 20, Powell mused that the neutral rate might have risen, at least temporarily, given how resilient the economy has been in the face of the Fed’s aggressive credit tightening campaign.

His comments came against a backdrop of investors already thinking so-called R-star is permanently higher coming out the pandemic, and some Fed policymakers themselves bumping up their own estimates of the equilibrium rate.

The result: Powell “put a little bit of fuel on the fire” in the bond market, said Adam Abbas, co-head of fixed income for Harris Associates, with more than $100 billion in assets under management.

Whatever the reason for the rise in long-term rates, it’s something that policymakers will need to keep their eye on in case in gets out of control.

“If the moves get extreme or persistent, it could get the Fed engaged,” Clarida said.

Updated: 10-9-2023

Treasury-Market Selloff Has Become The Worst Bond Bear Market Of All Time, According To BofA

The Tell

Treasury bonds’ losses over the past three years have amounted to the worst bear market in the nearly 250-year history of the U.S., according to Bank of America’s Michael Hartnett, who included some charts on Treasury performance in his latest “flow show” note shared with MarketWatch late last week.

According to one of these charts, Treasurys had lost nearly 25% on a total return basis between the market’s peak in July 2020 and Halloween 2022, with the market essentially unchanged in the interim.

Over the past week, yields on long-duration Treasury securities like the 10-year note and 30-year bond have touched their highest levels in more than 16 years, according to FactSet data. Bond yields move inversely to prices.

Yields have been marching higher since late July, which has helped heap pressure on U.S. stocks. The runup in long-bond yields accelerated after the Federal Reserve signaled in September that it expected to keep yields higher for longer than investors had previously expected.

“It’s the greatest bond bear market of all time,” said Michael Hartnett, the BofA strategist who authored the note. He pointed out that losses on some 30-year bonds have topped 50%, as MarketWatch has reported.

The latest leg of the bond-market selloff has been particularly painful for investors as bonds and stocks have fallen in tandem, as they did in 2022, leading to dramatic losses in portfolios with exposure to both.

However, investors worried about more bond-market pain to come may find solace in signs that the selloff is starting to look overdone. According to a BofA analysis, Treasury prices are looking overstretched relative to their 200-day moving average.

Bank of America’s hold-to-maturity bond book is seeing huge paper losses amid the selloff, according to analysts’ comments and a recent report by Bloomberg News, which blamed the banks’ long-dated Treasury and mortgage-bond holdings for dragging on profit.

Treasury trading was closed on Monday due to a bank holiday in the U.S., but futures contracts tied to Treasury bonds climbed as Hamas’s incursion into southern Israel over the weekend stoked concerns about escalating geopolitical risk. The iShares 20+ Year Treasury Bond ETF meanwhile, was up 1.3% at $85.86 a share.

On Monday, Dallas Fed President Lorie Logan said rising Treasury yields could diminish the need for further interest-rate hikes, which could help support bond prices, since concerns about the Fed’s hiking plans have been front and center for bond markets.

Updated: 10-14-2023

Bond Market Chaos To Increase by March 2024

The major issue with the bond market right now is the overwhelming amount of bond issuance combined with the notable absence of the usual buyers.

In other words, the illiquidity is already causing U.S. sovereign debt to trade like a microcap penny stock. This dysfunctional trading environment should become exponentially worse by the end of Q1 2024.

The U.S. national debt is now $33.5T, and the interest on that debt is $712b so far this year. That interest expense is set to double over the next few years as our debt is rolling over at much higher interest rates.

Interest payments equal to 17% of all Federal revenue and should easily jump to 35% of all income very soon.

The deficits will be much greater when the recession arrives, as the automatic economic stabilizers kick in, just as revenue also collapses.

Entitlements and debt service payments will equal 100% of all revenue by 2040 at the very latest. At that point, there will be no room for any other government spending.

Our bond market is fracturing, and it is becoming an existential crisis for our financial system. What else would you expect when the nation’s annual deficit is 45% of our revenue, and that is adding on each year to the national debt, which is an incredible 771% of annual federal income!

I have explained the reasons why long-duration bonds have been a no-touch for the past several months. China is having to sell Treasuries to support the Yuan. Japan is doing the same to boost the Yen, in addition to relaxing yield curve control, which increases the relative attractiveness of JGBs over U.S. bonds.

Disinflation is being replaced by reflation, and the Atlanta Fed’s incredible 5% prediction for Q3 GDP is putting more upward pressure on yields and keeping potential buyers at bay.

The big surprise here is that this volatility is occurring while there is still $1.2 trillion in the Fed’s Reverse Repo (RRP) facility. Banks first parked their excess reserves, which were the result of the massive COVID stimulus packages from the Treasury, at the Fed to earn risk-free interest. That figure reached a high of $2.5 trillion in December of 2022.

However, in the last 5 months, the amount in the RRP has crashed by over $1 trillion. This is, in essence, funding the Fed’s Q.T. program. If the current pace of RRP selling continues, the number of excess reserves parked at the Fed will be near zero by March of 2024. It will be at that point that much of the liquidity in the bond market will have evaporated.

As mentioned, most of the carnage in the bond market currently is due to the overwhelming supply issuance, which is a direct consequence of our intractable debt and deficits and the absence of foreign buyers.

In fact, they have become sellers of our debt. Just imagine the chaos that will occur in the next few months when this major source of readily accessible Treasury liquidity runs dry.

There are only two ways to possibly save us from the coming bond market collapse. The first is an immediate and complete restructuring of S.S., Medicare, Medicaid, and Defense that includes humongous cuts in benefits across the board. This will be as easy for Congress to accomplish as a camel going through the eye of a needle.

And if the impossible does occur, the concomitant resulting recession would be so catastrophic that it might end up rendering the nation insolvent anyway.

The other temporary salve would be if the delayed recession were to occur imminently. That would send investors scurrying out of equities and into the relative safety of U.S. bonds.

However, again, the resulting amount of red ink from the election of the automatic economic stabilizers would send deficits and debt skyrocketing from their already untenable $2 trillion level.

During the last two recessions, annual deficits increased by over 200%. Hence, the U.S.’s insolvency fate would be sealed regardless, as the annual amount of red ink could jump to $6 trillion, or an incredible nearly 25% of our entire GDP.

In the same month the RRP facility runs out, the $100 billion in distressed bank assets currently festering in the Bank Term Funding Program are scheduled to return to these financial institutions at a fraction of par value.

Banks must then give the Fed 100 cents on the dollar plus accrued interest. Remember that these impaired assets threatened to render the entire regional banking sector insolvent at the start of this year.

These Treasuries, MBS, and corporate bonds are even further underwater than when Mr. Powell first allowed them to be parked at the Fed. Oh, and by the way, March of next year will also be when the full lagged effects of 500bps in monetary tightening will begin to have their maximum impact.

Hence, within the next 5 months, the bond market should spiral into complete chaos, and the Fed will be forced to end Q.T., start cutting interest rates towards the zero bound, and venture back into Q.E. once again.

The stagflationary ramifications of all this will be staggering, especially since no investor will be duped into believing the Fed can adroitly fight inflation without crippling the banking system and the economy and risking a sovereign U.S. debt crisis.

The stock market will not remain unscathed at all. According to Bank of America, about one-third of all companies in the Russell 2000 are not profitable.

These company’s very existence depends on their ability to borrow money at ultra-low interest rates. Two years ago, they could borrow new funds to keep the lights on below 4%; today it will cost them 9.3%.

This is an existential crisis for 33% of small businesses, which are the engine of employment growth. Therefore, the labor market should begin to fracture by early 2024. A spiking unemployment rate will cause the real estate market to suffer the same dire fate as the bond and stock market.

There is still some money to be made in the overall market until the end of Q1 2024 arrives. However, this is especially crucial for the 60/40 portfolio bag holders; you better be able to identify when the freezing of the debt markets is about to arrive because securities could get wiped out across the board.

The swings between inflation and deflation will become more violent and destructive over time. Active and smart management is the best hope to survive and thrive in this chaos.

By Michael Pento

Updated: 2-12-2024

US Government TIPS ETF’s Lose $43 Billion While Bitcoin ETF’s Gain $10 Billion

* Retail Investors Yanked Money After Record TIPS Losses

While Treasury inflation-protected securities, or TIPS, provide additional payments to make up for the rise in consumer prices, they weren’t insulated from the impacts of the Fed’s monetary policy tightening.

Between cash outflows and capital losses, the combined assets of the 10 largest US exchange-traded funds that focus on inflation-linked bonds have tumbled from a peak of more than $99 billion in early 2022 to around $57 billion.

Michael Pond, the head of global inflation-linked research at Barclays Capital, said the losses may have surprised individual investors who flocked to the ETFs, thinking they were a haven. When they lost money instead, many likely decided to pull out.

BlackRock Inc.’s $19 billion iShares TIPS ETF – the largest of its kind — attracted a record $12 billion in 2021, only to see $14 billion withdrawn in the following two years. The fund lost about 5% over the past three years.

“When TIPS had negative returns, many sold them after the fact because they hadn’t performed,” Pond said.

The great market inflation hedge of the pandemic era is officially over.

That’s about what they held in late 2020, before the outbreak of the nation’s first major consumer-price surge since the early 1980s.

The pullback underscores how confident investors are that the Federal Reserve has brought inflation back under control. That’s expected to be evident Tuesday, when economists predict the Labor Department will report that the annual increase in the consumer-price index pulled below 3% for the first time in roughly three years. In June 2022, it was rising at about three times that pace.

The shift in sentiment isn’t surprising, given that Fed officials share investors’ confidence and anticipate that they will be able to start dialing back interest rates this year to avoid stifling the economy.

And ETFs that cater to the investment trend of the moment typically see big pullbacks when investors move on to the next big thing.

“We experienced huge growth post-Covid,” Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management, said about the TIPS flows. “Now, growth feels soft-landing-ish and the need for inflation protection has been lessened. There is less of a demand for this style portfolio allocation.”

But some of the pullback may reflect another fact: The ETFs didn’t actually fare that well as a safeguard against inflation.

As the central bank pushed up interest rates with unusual speed, their prices tumbled along with other fixed-income securities, more than erasing the extra payouts tied to inflation.

A Bloomberg index tracking the TIPS lost a record 12% in 2022. After rebounding 3.9% last year, the benchmark lost 1.2% so far in 2024.

Updated: 3-25-2024

Junk Market Flashes Warning As Rates Seen Staying High

* Interest Coverage Ratios Have Deteriorated Since Hikes Began

* US Leveraged-Loan Default Rate Has Climbed To 6.22%, TD Says

Junk-rated US companies have seen their interest costs rise after the Federal Reserve’s rate-hike campaign, but profits haven’t kept up, putting a squeeze on finances and underscoring a key risk for investors in high-yield debt as the trend persists.

The ratio between companies’ earnings and their interest expense has fallen to the lowest level since the pandemic, signaling they have less income to service their debt.

The so-called debt-service coverage ratio averaged just 3.5 times for the median company in the leveraged-loan universe at the end of September, according to Torsten Slok, chief economist at Apollo Global Management, down from more than 5 times a year earlier.

The deterioration is a knock-on effect of the Fed’s months-long campaign to combat inflation by raising its key benchmark rate by some 5 percentage points since 2022.

While central bankers reiterated at a policy meeting last week that they expect their next move will be a rate cut, Chair Jerome Powell hesitated to say when reductions would start, noting that the data supported a Fed’s cautious approach.

Higher-for-longer rates mean borrowers will continue to feel the pinch long after the rate-hike cycle is over. Though the latest debt-service ratios aren’t dire, the expense adds up, and it’s a pressure that can factor into ratings downgrades and even force corporate defaults.

Once a company’s debt service coverage ratio falls below 2 times, it often struggles to refinance maturing loans and bonds, said Christian Hoffmann, portfolio manager at Thornburg Investment Management.

“It’s been nearly a year of what’s likely peak rates,” Hoffmann said. “As the Fed keeps rates pinned higher, leveraged loan borrowers will continue to feel pain.”

Already, the US leveraged loan default rate has climbed to 6.22% as of Feb. 29 from 6.16% a month earlier on a trailing 12-month basis, coming closer to the peak rate of 7.7% during two of the last three recessions, according to TD Securities Inc. strategist Hans Mikkelsen. The bank’s model predicts further increases, he wrote in a note on Friday.

“The stress from prolonged higher cost of capital is evident as default volumes continue to rise.” Lyuba Petrova, managing director at Fitch Ratings said last week.

For now, money managers don’t seem overly fearful of lower debt-service coverage ratios. The average loan was priced at about 96.6 cents on the dollar on Friday, close to its highest levels since May 2022, according to the Morningstar LSTA US Leveraged Loan Price Index. And a measure Barclays uses to reflect complacency in credit markets spiked to the highest since January 2022.

There are some signs of concern, though. On Thursday, the day after the Fed meeting, the average leveraged loan price had its biggest decline

in five months. And Bank of America Corp. strategist Oleg Melentyev wrote in a note Friday that most of the refinancings seen in the loan market this year were at the highest quality segments first, before expanding to mid-quality in the last few months.

“Lowest quality market access remains substantially constrained,” Melentyev wrote.

The problem is more pronounced in loans than in high-yield bonds, because loans are usually floating-rate obligations, meaning their interest costs are adjusted higher more quickly in an environment of rising rates than fixed-rate bonds.

“The loan market from a coverage ratio is much worse off than high yield,” said John Lloyd, lead for the multi-sector credit strategies and a portfolio manager at Janus Henderson.

“The evidence of that is that you’re seeing many more downgrades and slightly higher defaults in leveraged loans than you are in high yield.”

While fixed-rate borrowers are more insulated from the rate-hike cycle, they will be subject to the same pressures when they need to refinance, assuming the rate backdrop doesn’t change.

“Stress will intensify for those borrowers that are not bringing leverage down to maintain adequate coverage ratios,” said Bill Zox, a portfolio manager at Brandywine Global Investment Management.

“If borrowers have their heads buried in the sand, betting on much lower base rates, I am a seller.”

Updated: 4-10-2024

A Million Simulations, One Verdict For US Economy: Debt Danger Ahead

Bloomberg Economics ran a million forecast simulations on the US debt outlook. 88% of them show borrowing on an unsustainable path.

The Congressional Budget Office warned in its latest projections that US federal government debt is on a path from 97% of GDP last year to 116% by 2034 — higher even than in World War II. The actual outlook is likely worse.

From tax revenue to defense spending and interest rates, the CBO forecasts released earlier this year are underpinned by rosy assumptions. Plug in the market’s current view on interest rates, and the debt-to-GDP ratio rises to 123% in 2034.

Then assume — as most in Washington do — that ex-President Donald Trump’s tax cuts mainly stay in place, and the burden gets even higher.

With uncertainty about so many of the variables, Bloomberg Economics has run a million simulations to assess the fragility of the debt outlook.

In 88% of the simulations, the results show the debt-to-GDP ratio is on an unsustainable path — defined as an increase over the next decade.

The Biden administration says its budget, featuring a slew of tax hikes on corporations and wealthy Americans, will ensure fiscal sustainability and manageable debt-servicing costs.

“I do believe we need to reduce deficits and to stay on a fiscally sustainable path,” Treasury Secretary Janet Yellen told lawmakers in February.

Biden administration proposals offer “substantial deficit reduction that would continue to hold the level of interest expense at comfortable levels. But we would need to work together to try to achieve those savings,” she said.

Trouble is, delivering on such a plan will require action from a Congress that’s bitterly divided on partisan lines.

Republicans, who control the House, want deep spending cuts to bring down the ballooning deficit, without specifying exactly what they’d slash.

Democrats, who oversee the Senate, argue that spending is less of a contributor to any deterioration in debt sustainability, with interest rates and tax revenues the key factors. Neither party favors squeezing the benefits provided by major entitlement programs.

In the end, it may take a crisis — perhaps a disorderly rout in the Treasuries market triggered by sovereign US credit-rating downgrades, or a panic over the depletion of the Medicare or Social Security trust funds — to force action. That’s playing with fire.

Last summer provided a foretaste, in miniature, of how a crisis might begin. Over two days in August, a Fitch Ratings downgrade of the US credit rating and an increase of long-term Treasury debt issuance focused investor attention on the risks.

Benchmark 10-year yields climbed by a percentage point, hitting 5% in October — the highest level in more than one and a half decades.

As for how things might end, Britain’s experience in fall 2022 provides a glimpse into the abyss. Then-Prime Minister Liz Truss’s plan for unfunded tax cuts sent the gilt market into a tailspin.

Yields soared so quickly that the central bank had to step in to snuff out the risk of an outright financial crisis. The bond vigilantes’ actions forced the government to call off the plan and Truss out of office.

For the US, the dollar’s central role in international finance and status as the dominant reserve currency lowers the odds of a similar meltdown. It would take a lot to shake investor confidence in US Treasury debt as the ultimate safe asset.

If it did evaporate, though, the erosion of the dollar’s standing would be a watershed moment, with the US losing not just access to cheap financing but also global power and prestige.

Variable Variables

How does the CBO, Washington’s official budget watchdog, arrive at its debt forecast? The CBO’s assumptions for crucial variables — GDP growth around 2%, inflation returning to 2%, interest rates drifting down from the current levels — are squarely in the ballpark of plausibility.

They’re also not far from numbers in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters. Indeed, the CBO’s view on rates is a little higher than the most recent consensus.

Examine them closely, though, and key assumptions underpinning the CBO forecast appear optimistic:

By law, the CBO is compelled to rely on existing legislation. That means it assumes the 2017 Trump tax cuts will expire as scheduled in 2025. But even President Joe Biden wants some of them extended.

According to the Penn Wharton Budget Model, permanently extending the legislation’s revenue provisions would cost about 1.2% of GDP each year starting in the late 2020s.

The CBO also must assume that discretionary spending, which is set by Congress each year, will increase with inflation, not keep pace with GDP. As a result, defense spending falls from around 3% of GDP now to about 2.5% in the mid-2030s — a tall order given the wars currently raging and the geopolitical threats that loom.

Former Treasury Secretary Lawrence Summers says a more realistic forecast would add at least 1% of GDP to the CBO’s outlook.

Market participants aren’t buying the benign rates outlook, with forward markets pointing to borrowing costs markedly higher than the CBO assumes.

Bloomberg Economics has built a forecast model using market pricing for future interest rates and data on the maturity profile of bonds. Keeping all the CBO’s other assumptions in place, that shows debt equaling 123% of GDP for 2034.

Debt at that level would mean servicing costs reach close to 5.4% of GDP — more than 1.5 times as much as what the federal government spent on national defense in 2023, and comparable to the entire Social Security budget.

Heavyweights from across the political spectrum agree the long-term outlook is unsettling. Fed Chair Jerome Powell said earlier this year it was “probably time — or past time” for politicians to get going in addressing the “unsustainable” path for borrowing.

Former Treasury Secretary Robert Rubin said in January the nation is in a “terrible place” with regard to deficits.

From the realm of finance, Citadel founder Ken Griffin told investors in a letter to the hedge fund’s investors Monday that US national debt is a “growing concern that cannot be overlooked.”

Days earlier, BlackRock Inc. Chief Executive Officer Larry Fink said the US public debt situation “is more urgent than I can ever remember.”

Ex-IMF chief economist Kenneth Rogoff says while an exact “upper limit” for debt is unknowable, there will be challenges as the level keeps going up.

Rogoff’s broader point is well taken: forecasts are uncertain. To put some parameters around the uncertainty, Bloomberg Economics has run a million simulations on the CBO’s baseline view — an approach economists call stochastic debt sustainability analysis.

Each simulation forecasts the debt-to-GDP ratio with a different combination of GDP growth, inflation, budget deficits, and interest rates, with variations based on patterns seen in the historical data.

In the worst 5% of outcomes, the debt-to-GDP ratio ends 2034 above 139%, which means that the US would have a higher debt ratio in 2034 than crisis-prone Italy did last year.

Yellen has another way of thinking about debt sustainability: inflation-adjusted interest expense, which she’s indicated she’d prefer to see below 2% of GDP. On that basis, the results are more hopeful — finding that the metric averaged over the next 10 years violates the threshold in less than a third — 30% — of simulations.

The Treasury chief herself acknowledged in a Feb. 8 hearing that “in an extreme case” there could be a possibility of borrowing reaching levels that buyers wouldn’t be willing to purchase everything the government sought to sell.

She added that she saw no signs of that now.

Partisan Politics

Getting to a sustainable path will require action from Congress. Precedent isn’t promising. Disagreements over government spending came to a head last summer, when a standoff over the debt ceiling brought the US to the brink of a default.

The deal to halt the havoc suspended the debt ceiling until Jan. 1, 2025, postponing yet another clash over borrowing until after the presidential election.

It’s hard to imagine a US debt crisis. The dollar remains the global reserve currency. The annual and unseemly spectacle of government-shutdown brinksmanship typically leaves barely a ripple on the Treasury market.

Still, the world is changing. China and other emerging markets are eroding the dollar’s role in trade invoicing, cross-border financing and foreign exchange reserves.

Foreign buyers make up a steadily shrinking share of the US Treasuries market, testing domestic buyers’ appetite for ever-increasing volumes of federal debt.

And while demand for those securities has lately been supported by expectations for the Fed to lower interest rates, that dynamic won’t always be in play.

Herbert Stein – head of the Council of Economic Advisers in the 1970s – observed that “if something cannot go on forever, it will stop.” If the US doesn’t get its fiscal house in order, a future US president will have the truth of that maxim confirmed. And if confidence in the world’s safe asset evaporates, everyone will suffer the consequences.

Methodology

As a starting point for the analysis, Bloomberg Economics uses the baseline fiscal and economic outlook — including the effective interest rate, primary budget balance as a percent of GDP, inflation as measured by the GDP deflator, and real GDP growth rate — from the latest long-term CBO projections.

For the calculation of the debt-to-GDP ratio using market forecasts for rates, we substitute in forward rates as of March 25, 2024, and project future effective rates on federal debt based on a detailed bond-by-bond analysis.

To forecast the distribution of probabilities around the CBO’s baseline debt-to-GDP view, we conduct a stochastic debt-sustainability analysis:

We estimate a VAR model of short- and long-term interest rates, primary balance-to-GDP ratio, real GDP growth rate, and GDP deflator growth using annual data from 1990 to 2023. The covariance matrix of the estimated residuals is then used to draw one million sequences of shocks.

We use data on the maturities of individual bonds to map short- and long-term interest-rate shocks to the effective rate of interest paid on US federal debt.

Using this model, Bloomberg Economics considers two definitions of sustainability. First, we check if the debt-to-GDP ratio increases from 2024 to 2034. Second, we examine if the average inflation-adjusted interest expense, scaled by nominal GDP, over the 10 years from 2025-2034 is less than 2%.

Updated: 4-2-2024

Bond Market Sees Fewer Rate Cuts Than Fed, Deepening Losses

* Traders No Longer Price In Three Quarter-Point Cuts In 2024

* Most Treasury Yields Reach Year-To-Date Highs As Rout Extends

For a brief moment last week, the market and the Federal Reserve were on the same page about the pace of monetary easing. It didn’t last long, and Treasuries investors are paying the price.

After spending much of this year making bets that were much more dovish than those of Fed officials, investors have now flipped in the opposite direction.

They’re forecasting about 65 basis points of rate reductions in 2024, compared to the 75 basis points signaled by the median estimate of projections released following the Fed’s March 19-20 meeting.

The reassessment is driving investors to demand higher rates of return on US government bonds. Yields on Treasury debt maturing in five to 30 years climbed to the highest levels this year Tuesday.

The 30-year yield topped 4.5%, and the benchmark 10-year note is higher by about 16 basis points over the past two days, its biggest jump since early February.

“I thought it would be hard for the market to challenge the Fed on the hawkish side, but apparently it is willing to do so, in the face of some evidence,” said Benoit Gerard, a rates strategist at Natixis in Paris.

Traders are reacting to a couple of economic data points from the past few days that point to strength in the US economy, potentially reducing the need for rate cuts.

Reports Tuesday on job openings and factory orders, though also stronger than anticipated, had little impact on already elevated yield levels. Key employment data for March are ahead Friday.

The impetus to higher yields began Friday, when US markets were closed. Income and spending data for February that showed consumption remains strong.

Then, on Monday, a gauge of US manufacturing activity expanded for the first time since 2022, exceeding all estimates in a Bloomberg survey of economists.

Fed Chair Jerome Powell said after the consumption data that the figures were “pretty much in line with our expectations” and repeated that the US central bank isn’t in any rush to cut interest rates.

That message was echoed Tuesday by San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester, who said they still expect the US central bank to cut rates three times in 2024, though they’re in no rush to begin.

It’s not the first time in recent weeks traders have challenged the Fed’s outlook. They were also betting on fewer than 75 basis points of easing in the days leading up the March rates decision, though this time round the pricing is even more hawkish.

The shift is also casting doubt on bets that the first rate cut will land in June. The probability of a quarter-point reduction in June briefly dropped below 50% on Monday.

“While June is not off the table, market conviction for a first Fed cut by then is fading,” ING strategists including Benjamin Schroeder wrote in a note.

“In the coming weeks we can expect some Fed speakers to remain vocal about June cuts, but in the end the data will be the deciding factor.”

Updated: 4-9-2024

Barrage of Short Wagers Leaves Bonds Primed for Post-CPI Squeeze

* Leveraged Funds Lift Bearish Bets For First Time Since January

* Tuesday Rally Suggests Negative Positioning May Be Overdone

Treasury bond traders have turned so bearish ahead of a key inflation report that they risk getting squeezed on a less than red-hot reading.

Funds that use borrowed money to amplify returns increased short positions in the Treasury futures market for the first time in two months amid the recent rise in US yields, weekly data from the CFTC shows.

Investors also boosted bearish wagers in the cash market, with JPMorgan Chase & Co.’s latest client survey

showing a rise in short positions that left clients net neutral — as opposed to net long — for the first time in almost a year as of April 8.

Treasury yields reached their highs for the year this week after signs of a buoyant US economy and cautionary comments from central bankers caused traders to keep scaling back expectations for interest-rate cuts in 2024. Both Friday’s
and Monday’s

trading sessions showed a buildup of short positions based on changes in open interest that reflected traders hedging against the risk of a further rise in Treasury yields.

On Tuesday, US bonds recouped some of their recent losses, sending yields down a touch from their highs. Now, traders await a crucial report on consumer prices Wednesday that may either validate their more hawkish stance — or cause yet another repricing.

Economists forecast that consumer prices rose 0.3% in March on a monthly basis, both overall and excluding food and energy costs. With the market positioned so bearishly, a softer reading has the potential to trigger a more dramatic reaction, analysts at Wells Fargo & Co. wrote in an April 5 report.

“On the heels of the bond market’s recent poor performance, we think US yields will react more sharply if core CPI prints below the 0.3% Bloomberg consensus than if it comes in hot,” they wrote.

Already, there are signs that some investors may be looking to close out bearish bets ahead of the data.

Tuesday’s gains in shorter-dated securities got a big boost from a record-size block trade in short-term interest-rate futures, which appeared consistent with an outright buyer.

With yields at their highs for the year, the large trade could be an early sign that some are seeing the bond market as overly stretched on the short side.

Also, Commodity Futures Trading Commission data shows some asset managers have been willing to take on more interest-rate risk lately.

Here’s A Rundown Of The Latest Positioning Indicators Across The Rates Market:

Treasury Clients Short

JPMorgan’s latest survey of Treasury clients showed shorts rising 2ppts, leaving clients net neutral for the first time since April 17, 2023.

On an outright basis, short positions remain the biggest since the start of the year while outright longs are the fewest since February.

Hedge Funds Rebuild Futures Shorts

The latest CFTC data covering the week leading up to April 2 showed that leveraged funds extended their net short position for the first time since the end of January.

The add to short positioning was equivalent to approximately 171,000 10-year note futures equivalents, with most of the net short being extended in the five-year note contract for a risk weighting of $6.8 million per basis point.

On the other side of the trade, asset managers rebuilt long duration bets by the most since August last year, adding to net long duration positions by around 222,000 10-year note futures equivalents.

Expensive To Hedge Bond Selloff

The premium paid to hedge a selloff in Treasuries remains elevated, with the highest premium seen via the so-called put/call skew on futures in the long-end of the curve during a week in which yields across all tenors rose.

Flows in the options market this week have reflected this bearish sentiment, including a bunch of trades seen Monday targeting a move beyond 5% in both 5- and 10-year Treasuries.

Updated: 4-19-2024

How Not To Invest In The Bond Market

Investors poured billions into long-term U.S. government funds last year. Right on cue, the market tanked—again.

Only a few things in investing life are certain. One is that investors will always find a way to lose ungodly amounts of money on bond funds.

In 2023, investors poured a record $54 billion into mutual funds and exchange-traded funds specializing in long-term U.S. government debt, according to Morningstar.

More than half of the iShares 20+ Year Treasury Bond ETF’s $46.1 billion in total assets, for instance, came in during last year alone.

Right on cue, funds of Treasury bonds maturing in 20 years or beyond have lost about 9% so far this year, handing billions of dollars in losses to their latest buyers.

Investors similarly shot themselves in the foot by loading up on bond funds in 1993 and 2014, right before the market tanked. You can avoid their fate, though, by following a few basic guidelines.

It’s impossible to say for sure why so many people barged into long-term bond funds last year. Some, says Steve Laipply, global co-head of fixed-income ETFs at BlackRock, may just have been thinking, “Finally, I can get a yield in bonds that I haven’t been able to get in years and years.”

U.S. Treasury securities are often called risk free, but they aren’t—especially if you’re buying funds that fluctuate every day even though their bonds won’t mature for at least two decades.

If you predict that rates will fall and you turn out to be right, you’ll hit a home run with long-term bonds. Hold individual Treasury bonds until they mature in 2044 or beyond, and you’re guaranteed to earn the yield to maturity (about 4.8% this week), with no loss to principal.

If you turn out to be wrong and rates rise, you’ll still get all your principal back. (We’re ignoring inflation here.)

As individual bonds approach maturity, they become less sensitive to changes in interest rates. That isn’t the case with most bond funds, however; a long-term fund can remain volatile for as long as you own it. Depending on when you need to sell, that can be good or bad.

If you want to lock in almost a 5% yield for the next 20 years or more, you’re probably better off with a long-term Treasury bond you can hold until maturity than with a long-term Treasury bond fund whose interim value will bounce around.

Whether you own a long-term bond or a long-term bond fund, you have to be ready to ride a roller coaster. At the biggest long-term Treasury funds, the duration, or sensitivity to changes in interest rates, ranges between roughly 15 and 16.

That means an immediate one-percentage-point decline in rates would automatically raise the value of these funds by approximately 15% to 16%.

By the same token, a one-time, one-percentage-point rise in interest rates would knock about 15% or 16% off the funds’ value.

You’d incur an immediate $1,500 to $1,600 loss on a $10,000 investment—although, over time, the rise in rates would increase the income on the fund’s bonds, enabling you to recoup some of that loss.

Long-term bond funds are so sensitive to changes in interest rates that even a 0.25-point move by the Fed will change the value of these funds by approximately 4%.

Because long-term bonds will produce the biggest gains if rates go down, they give you “more bang for your buck,” says Laipply of iShares.

That doesn’t mean you should use them to act on an interest-rate forecast.

Less than four months ago, Wall Street was convinced that the Federal Reserve would cut interest rates a half-dozen times in 2024.

As recently as last month, the Fed itself signaled that it would likely cut rates three times this year.

This week, however, Fed Chairman Jerome Powell hinted that cutting rates might not be feasible anytime soon, given the robustness of the economy and the stubbornness of inflation.

Repeat after me: No one—not even the Fed!—can reliably forecast interest rates or the Fed’s actions.

You’re kidding yourself if you think you can consistently make money by betting on what interest rates are going to do. And your financial advisers are kidding you if they say they are “positioning” your portfolio for a specific interest-rate scenario.

If the Fed itself can’t forecast rates, why would your financial advisers think they can?

Historically, the longer a bond’s maturity, the more interest income it pays; that higher yield has compensated investors for the risk of locking up their money for longer.

This week, though, three-month Treasury bills yielded just under 5.4%, about 0.7 percentage points more than 30-year Treasurys.

And intermediate Treasurys maturing in five and 10 years were yielding about 4.6%, barely less than the 30-year bond.

The upshot is that you can earn more on short-term than on long-term Treasurys. And intermediate-term debt—which historically has offered nearly all the return of long-term Treasurys at less risk—pays almost as well as the longest bonds.

So if you don’t own a long-term bond fund, don’t buy one.

If you do own one, brace yourself. The iShares 20+ Year Treasury Bond ETF lost 14% in the first 10 months of 2023. Then, in the final two months of last year, it gained 16.9%.

“There’s going to be volatility with these funds,” says Sam Martinez, head of bond index product for Vanguard. “Investors can use dollar-cost averaging to assuage the psychological strain of that volatility.”

That means reinvesting your interest income in the fund, or even buying more outright, to smooth the ride.

Better yet, take some of the risk out of your “risk-free” investments. Keep plenty of your money in Treasury bills and make an intermediate fund—or individual intermediate Treasurys—the heart of your fixed-income portfolio.

Updated: 5-6-2024

At $2 Million Per Minute, Treasuries Mint Cash Like Never Before

In March alone, the Treasury Department paid out. about $89 billion in interest to debt holders — or roughly $2 million a minute.

Money, Money, Money

In February, the Congressional Budget Office projected that interest and dividends paid to individuals will rise to $327 billion this year — more than double the amount in the mid-2010s — and keep increasing each year over the coming decade.

Currently, rates would need to go up by over three-quarters of a percentage point over the next year before Treasuries start to lose money, at least on paper.

Over the past decade, that margin of safety at times virtually disappeared.

The numbers tell the story. Last year, investors pocketed nearly $900 billion in annual interest from US government debt, double the average over the previous decade. That’s set to rise as over 90% of Treasuries carry coupons of 4% or more.

It’s no small irony that the newfound income from Treasuries may itself be playing a role in keeping the “higher-for-longer” narrative intact.

After accounting for inflation, yields are now back above 2%. The last time that happened on a sustained basis was prior to the 2008 financial crisis.

Then, there’s the massive US deficit, which is all but certain to be financed by a never-ending supply of new bonds. Not only is that likely to keep yields elevated, but it will also provide a burgeoning source of interest income for bond investors, month after month.

A small, but growing number on Wall Street argue that, along with the surge in stock prices, the interest paid on Treasuries and other bond investments is creating a material wealth effect among Americans, with the extra cash acting like stimulus checks supporting the surprisingly resilient economy.

With the Federal Reserve in no hurry to cut interest rates, investors are flocking back to fixed-income assets in major reset for Wall Street.

For the first time in nearly a generation, fixed income is living up to its name.

This, at a certain level, is simply the consequence of benchmark rates in the US jumping from 0% to over 5% in a span of two years.

But at a time when all of Wall Street seems fixated on whether the Federal Reserve will actually cut interest rates this year — and heated arguments break out over whether the 10-year US bond should yield, say, 4.5% or 4.65% — it’s easy to lose sight of one important fact:

That after being held hostage by zero-rate policies for almost two decades, US Treasuries are finally reverting back to their traditional role in the economy.

That is, as a source of income that investors can lock in and rely on, year after year, for years to come — regardless of where yields are at any given moment.

In mid-2020, just 5% yielded that much. Because of the higher interest, investors are also better shielded against any jump in yields.

“With the help of our friends at the Fed, they did put the income back in fixed income,” said Anne Walsh, who oversees about $320 billion as chief investment officer of Guggenheim Partners Investment Management.

“And fixed-income investors, we get to reap the benefits of higher yield. That’s a good thing.”

Two recent economic trends have worked their favor.

First is that, while inflation is tantalizingly close to the point where the Fed might consider cutting rates, lately, progress toward its 2% goal has stalled. That’s pushed out rate-cut expectations into at least the latter part of the year.

Second, and perhaps more importantly, is simply that the economy keeps humming along (despite some signs of cooling in the labor market), which suggests the Fed won’t need to lower rates all that much when it does begin.

Fed Chair Jerome Powell underscored that wait-and-see approach in his remarks last week after the central bank held rates steady, while the traders currently see just two quarter-point cuts by year-end. At the start of the year, they priced in as many as six.

“Nobody is focused anymore on what could go wrong if the wheels come off with the economy,” said Blake Gwinn, head of US interest-rate strategy at RBC Capital Markets. “And every month that goes by is another month that a cut didn’t happen.”

As a result, safe assets like Treasuries — from one-month T-bills to 30-year bonds — now have something to offer anyone looking for income.

Of course, the whole point of owning US government bonds is that they aren’t supposed to lose money, are less volatile than equities and will provide a fixed rate of return above inflation.

There’s no sugar-coating the fact that the very reason Treasuries are back in demand as a buy-and-hold option — after years of yielding next to nothing — is because of brutal losses in recent years in the face of rampant inflation and the aggressive rate hikes to combat it.

That reset, however painful, has now paved the way for higher future returns and a “more normal” fixed-income market.

Investors have responded by piling in. Money-market funds — which invest in short-term securities like T-bills — saw their assets swell to a record $6.1 trillion last month.

Meanwhile, bond funds raked in $300 billion in 2023 and $191 billion so far this year, reversing outflows in 2022 that were the biggest in recent memory, according to EPFR data. Direct sales of Treasuries to individuals have jumped, too.

All told, the amount of debt held by households and non-profits has surged 90% since the start of 2022 to a record $5.7 trillion, according to Fed statistics.

Dan Ivascyn, chief investment officer at Pacific Investment Management Co., says the reset in yields for high-quality debt of all kinds, from Treasuries to corporate bonds, will have broad implications for the buyout firms, hedge-fund managers and private-credit shops that drew in hundreds of billions of dollars when rates were at rock-bottom lows.

Back To The Future

He also noted that bonds are now a “tremendous value” versus stocks. By one measure, known as the Fed model, they’re more attractive versus US equities than at any time since 2002.

“We’re seeing far more inquiries for fixed income than we’ve seen in the last almost 15 years,” Ivascyn said. Investors are asking themselves “why am I making it so complicated when I can get 6, 7, 8% from bonds? So it’s opening up a whole new buyer base.”

There is, of course, no certainty this will stay the case. But there are solid reasons to believe that yields won’t revert back to their post-financial-crisis levels even after the Fed starts cutting rates. That means fixed income will likely remain in demand.

For starters, nagging worries about inflation, fueled in part by trends like the de-globalization of supply chains, will likely keep rates from falling too far as investors demand protection against the risk their income will be eaten away by the rising cost of living.

“It seems like going back to the future — a little bit back to some normal times,’’ said Matt Eagan, a money manager at Loomis Sayles & Co., which oversees roughly $350 billion. “It’s quite a big turnaround.”

Updated: 12-30-2024

The U.S. Treasury Department Says It Was Hacked By China-Backed Actor!!!

Maybe, the Chinese hacked the system in an attempt to return those worthless U.S. government bonds!

How stupid is your government? They can’t figure out how to keep data safe. This is why I Bitcoin!!!

The U.S. Treasury Department said a state-sponsored Chinese hacking operation was able to access third-party software to tap into desktop computers of Treasury employees in what the department is calling “a major incident.”

The actual government contractor that was hacked was BeyondTrust which does business with the Department of Defense, Department of Veterans Affairs and the Department of Justice, along with other agencies.

Updated: 12-31-2024

Treasuries See Hoped-For Rally Fizzle Into Another Lagging Year

* Treasuries Return Less Than 1% This Year Even As Fed Cut Rates

* 10-Year Yields Rise For Fourth Year; T-Bills Trounce Bonds

Treasuries are poised to eke out only a minuscule return in 2024, disappointing bond traders who once anticipated a banner year as the Federal Reserve started pulling interest rates down from a more than two-decade high.

But instead of dropping, benchmark 10-year Treasury yields jumped 69 basis points this year to 4.56% — pushing down bond prices — as the strength of the economy drove the Fed to move at a more gradual-than-expected pace.

It marks the fourth straight year of rising yields, the longest such stretch since 1981.

The overall price drop was offset by interest payments, allowing a broad gauge of the Treasury market to post a gain of about 0.7% this year through Dec. 30, significantly less than the 5.3% return from short-term Treasury bills.

It represents the fourth year that bonds underperformed T-bills, which hasn’t happened since at least 1992, according to data compiled by Bloomberg.

The poor performance is the result of a resilient economy that forced investors to abandon the aggressive bets on monetary easing they were making when the year began.

The rise in the long-term bond yields also underscores concern that President-elect Donald Trump’s policies may fuel inflation and widen deficits by pouring more stimulus on the economy.

That’s been positive for stocks, however, with the S&P 500 climbing more than 20% for a second straight year.

“Generally speaking, equities were on an upward trajectory all year, while it’s been a shockingly volatile pattern for Treasuries,” said Jason Pride, chief of investment strategy and research at Glenmede Trust.

Short-term debt, which is more sensitive to the central bank’s policy rate, outperformed, with two-year yields poised to end the year nearly unchanged around 4.24%. That helped the Treasury yield curve restore its normal upward slope, ending a record-long inversion.

Yields followed a similar pattern in other major sovereign bond markets even as key central banks around the world, including the European Central Bank and the Bank of England, pivoted to rate cuts.

Investors are now betting that the Fed will slow down the pace of easing next year after lowering rates for the past three consecutive meetings.

While the labor market is cooling, the Fed made less progress in pushing inflation back to its 2% target.

Interest-rate swaps showed investors are betting that the Fed will likely lower its benchmark rate by half a percentage point next year, with the next quarter-point cut not widely seen until in June.

Updated: 1-3-2025

Us Republican Lawmakers Call On Treasury To Explain Recent Cyber Breach

Two congressional Republicans are calling for a briefing from the Treasury Department about the recent cyber breach by an alleged China-backed hacker.

Two US Republican Party lawmakers are calling on the Treasury Department to provide answers to how a Chinese state-sponsored entity hacked and accessed employee workstations.

In the Dec. 31 letter to Treasury Secretary Janet Yellen obtained by Law360, Senator Tim Scott, a member of the Senate Banking Committee, and Representative French Hill, the House Financial Services Committee vice chair, asked for a full congressional briefing on the breach by Jan. 10.

Scott and Hill want the briefing to cover the information accessed by the hackers, specific details on how it occurred and steps the Treasury has taken to ensure that similar incidents don’t happen in the future, adding:

“This breach of federal government information is extremely concerning.”

“As you know, Treasury maintains some of the most highly sensitive information on US persons throughout government, including tax information, business beneficial ownership, and suspicious activity reports,” they said.

The sectors said this information should be a priority to protect from theft or surveillance by foreign adversaries who might seek to harm the US.

“As such, the fact that a CCP [Chinese Communist Party]-sponsored APT [advanced persistent threat] actor was able to access Treasury’s information systems is unacceptable and raises serious questions about the protocols for safeguarding sensitive federal government information from future cybersecurity incidents,” the lawmakers added.

An unidentified threat actor breached employee workstations at the Treasury on Dec. 2, 2024, gaining access to certain “unclassified” documents.

Treasury officials told lawmakers in a Dec. 30 letter that the incident has been attributed to a Chinese state-sponsored APT actor.

The department said it would provide more details in a supplemental report in 30 days, as required under the Federal Information Security Modernization Act.

China has denied responsibility for the attack, telling Reuters it “firmly opposes the US’s smear attacks against China without any factual basis.”

Updated: 4-8-2025

The World Is Finding A Plausible Alternative To Treasuries

In the first rush for safe havens in years, global investors are finding there are credible alternatives to US Treasury bonds.

Yields on the benchmark 10-year Treasury have tumbled about 40 basis points this year, briefly falling below 4% in the past couple of days on President Donald Trump’s barrage of tariffs that economists say raise the risk of a recession.

In contrast, comparable rates in both Europe and Japan — which have also tumbled amid the risk aversion — remain up this year. In Germany, the 10-year bund at 2.66% reflects the prospect of a flood of bond issuance as the government ramps up defense spending.

Meanwhile, the rate on 10-year Japanese bonds has soared after spending years around zero and is now around 1.25% as investors brace for tighter monetary policy there.

While both are still well below Treasury yields, they’re at levels that makes them look more attractive than Treasuries to European and Japanese investors who hedge their dollar exposure when buying US securities.

That might entice investors to shift allocations to their home markets, where the policy outlook appears more stable.

“The idea that various of the administration’s policies could undermine foreign demand for Treasuries has been gaining currency,” said Matthew Raskin, head of US rates research at Deutsche Bank AG.

It all adds up to a world where US exceptionalism no longer is the dominant theme, with potentially momentous long-term implications: Deutsche Bank warns of a “confidence crisis” in the dollar, while UBS Group AG sees a shot in the arm to the euro’s status as a global reserve currency.

To be sure, until such a shift happens, a healthy dose of skepticism is merited. Bunds looked similarly appealing in mid-2023, only for an aggressive selloff in Treasuries to send 10-year US yields to 5%, eroding Europe’s yield advantage.

If tariffs reignite inflation, that could again push US yields higher.

Yet the fact that such a change in flows is even under discussion shows that investors are bracing for Europe to play a bigger role in global markets as competition for capital heats up.

That could lead to greater vulnerability in a US Treasury market that has found itself prone to buyers’ strikes in recent years amid concerns that supply could surge.

Monday’s decline in US Treasury bond prices looks to some market watchers like a sign that the haven appeal is on the wane.

“The UST selloff may be signaling a regime shift whereby US Treasuries are no longer the global fixed-income safe haven in periods of risk-off,” Ben Wiltshire, G-10 rates trading desk strategist at Citigroup Inc., wrote in an e-mailed note.

An early test arrived Tuesday with the sale of $58 billion of three-year securities that attracted lackluster demand. Treasury yields ticked higher, notably in the long end, after the auction, with the market focused on sales of 10- and 30-year maturities due in the next two trading sessions.

“Bond traders will be trying to gauge who blinks first, will it be the Fed or President Trump? If both stick to their current stance every Treasury auction is a landmine which investors will fear stepping in to.”

-Mark Cranfield, Markets Live Strategist, Singapore.

“With the world on the verge of a global growth shock unless tariffs are materially softened, the Treasury market might normally act as a safe haven. But the standard rules of international finance are in the process of being upended. Treasuries and the dollar are not the risk-free instruments they once were.”

-Simon White, Macro Strategist, London

For now, recent price moves present investors with a paradox — investors have flocked to Treasuries as a haven in the trade war turmoil, pushing up their prices and generating gains for existing holders.

Yet because yields move in the opposite direction of price, the bonds become less attractive to new buyers who are now offered lesser returns.

Traditionally, the US’s budget deficit has been financed in part by a wave of capital from across the world seeking exposure to Treasuries.

All in, foreign ownership of US Treasuries amounts to about a third of the market, while the foreign sector was the largest source of US bond demand last year, according to a Barclays Plc analysis of fund flow data.

That reflected net buying of $910 billion, about half of which was in Treasuries, they said.

Crucially, the vast majority of foreign Treasury holdings are in longer maturities, according to US government data.

That means as foreign demand dissipates, it can steepen the US yield curve, said Ales Koutny, head of international rates at Vanguard, meaning long-term rates rise relative to short-term ones.

An early indication of how investors are navigating the global shifts in yields may come within days. The new fiscal year has just begun in Japan, a time when firms there typically review their allocation strategies.

Japan is a key player on global bond markets because of the Bank of Japan’s decades-long policy of ultra-low rates, which sent investors out into the wider world in search of returns.

“There may be a shift in funds by Japanese investors since yields in Europe are more attractive,” said Hideo Shimomura, senior portfolio manager at Fivestar Asset Management Co. in Tokyo. “I think that’s the direction that Japanese investors in general will take.”

Germany kicked off the shift in early March, when it announced plans to unlock hundreds of billions of euros for defense and infrastructure. Bund yields soared as investors priced in a flood of bond issuance to pay for the spending.

The European Union’s large pool of excess savings means it is the largest foreign holder of US public debt, while it also plays an outsize role in US corporate funding. If European nations meaningfully ramp up investment, those savings may instead be kept at home.

Meanwhile, US policy under Trump looks less stable, potentially eroding the appeal of Treasuries. Besides his trade war, Trump has upended domestic politics by undertaking an effort to dramatically shrink the federal government and he’s alienated long-time allies by expressing his desire to acquire the Panama Canal, Greenland and Canada.

“The international market place is really scratching its head and what are the principles being espoused and how does that weigh on the certainty of expected returns in the future,” said Mark Howard, senior multistrategy analyst at BNP Paribas.

In any case, a growing body of investors and strategists are bracing for a rise in European rates. Howard expects “a gradual reversion to a more nationalistic investment process,” and believes “higher yields in Europe and Japan will satisfy those nationalistic impulses.”

“If we’re entering a phase of further deglobalization over the long term, that can be a factor that impacts the supply-demand balance for longer-dated Treasuries,” said Chitrang Purani, portfolio manager at Capital Group Inc.

Updated: 4-10-2025

The Dollar And The Bond Market’s Ominous Message For Trump

In the turmoil touched off by a trade war, the U.S. is no longer seen as safe.

The stock-market meltdown that accompanied President Trump’s intensifying trade war in recent weeks was unsettling enough. The fall in the dollar and rise in bond yields that went with it have been truly ominous.

So ominous, it might be why Trump changed course, at least temporarily, by pausing some of his tariffs Wednesday.

Normally when investors are this scared they seek safety, and nothing is safer than the dollar and Treasury debt.

But despite mounting fear of recession, the usual flight to safety hasn’t materialized. That is for several reasons, some relatively superficial, such as inflation risks, and one more fundamental.

In recent years, the U.S. has boasted faster growth, bigger advances in technology, and more-ample supplies of cheap energy than almost any other major economy. Investors worldwide flocked to “American exceptionalism” by buying its assets.

The U.S. is still exceptional, but it is also less predictable, more antagonistic, and more isolated. For foreign investors, that makes it less safe.

The S&P 500 peaked Feb. 19 and then began slipping as Trump rolled out tariffs on Canada, Mexico and China, aluminum and steel, and autos. The selloff gathered force after he slapped “reciprocal” tariffs on almost every country on April 2, and China retaliated.

In all the S&P 500 fell 19% through midday Wednesday, just before Trump announced a 90-day pause on the recent “reciprocal” tariffs, except on China. In that time, The Wall Street Journal’s Dollar Index dropped 4.5%.

Since Feb. 19, Treasury yields are down a bit, but since April 2, they are up about a quarter-percentage point. They rose sharply Tuesday night and Wednesday morning before Trump announced his pause. “People were getting a little queasy,” he admitted.

This behavior is unusual. In the seven prior episodes when the S&P 500 fell as much or more, the dollar rose. In the last episode, from January to June 2022, bond yields did rise, because the Federal Reserve was raising short-term interest rates sharply to combat inflation.

Inflation might be part of the explanation now. Tariffs will hurt demand and economic growth, which would normally prompt the Fed to lower interest rates. But tariffs will also raise inflation, at least temporarily, which makes it harder to justify rate cuts.

Nonetheless, with recession risks rising sharply, traders are now betting the Fed will cut rates this year. So the Fed isn’t the main reason bond yields are up.

Technical factors might be playing a role. Hedge funds might have been forced to liquidate bondholdings after their positions went against them, and dealers have done less to smooth out volatility.

Nonetheless, technical factors can’t explain why bonds and the dollar began behaving strangely weeks ago. The more fundamental explanation is that global investors might be changing how they view the U.S.

The dollar has long been the world’s reserve currency. Investors and central banks use dollars to defend their own currencies, pay for imports, repay debt, and for emergencies.

Businesses of all nationalities transact across borders in dollars. All that creates an enormous need to hold dollars, which are typically invested in Treasurys.

The dollar’s reserve status makes it artificially strong, which results in exports being more expensive and imports cheaper, contributing to the U.S. trade deficit.

In a speech this week Steve Miran, chairman of Trump’s Council of Economic Advisers, said other countries should share the U.S.’s burden of providing its defense umbrella and a reserve currency. One way, he said, was by paying tariffs.

Before joining the administration, Miran had, in a report, suggested other countries could help hold down the dollar through a “Mar-a-Lago” accord, and if they didn’t, the U.S. could impose a fee on their holdings of Treasurys.

In an email Wednesday, Miran said that he wasn’t advocating either idea then, and that the administration isn’t considering either now.

“The United States’ status as the provider of reserve assets is one of our greatest economic strengths and the President has been extremely clear that he will act forcefully to preserve it and vigorously oppose attempts to undermine it,” he said.

Still, investors might be reluctant to rule out such possibilities given how aggressively Trump has stretched existing laws to hit everyone with steep tariffs.

Jason Thomas, head of global research at Carlyle Group, noted that since early 2022, gold has strongly outperformed inflation-protected Treasurys, suggesting that gold is now the world’s preferred safe-haven asset.

Thomas said that after Russia invaded Ukraine, the U.S. and its allies froze the Russian central bank’s foreign-exchange reserves.

In recent months, Trump’s policies suggest the U.S. will play a less central role in global trade, making the dollar less important for invoicing exports and imports, he added.

As a result, Thomas said, “The global community and central bank reserve managers are just a bit more hesitant when it comes to adding to Treasury exposure.”

For Trump, this has one indirect benefit: It ensures a stronger dollar doesn’t cancel out the effect of his tariffs on trade.

But it carries a cost: Less demand for dollar assets makes it harder to finance the U.S.’s massive borrowing.

Now, if the trade deficit falls, the U.S. won’t have to sell as many assets to foreigners to finance that deficit.

And yet it would still be at the mercy of such investors. As of last June, foreigners held $7 trillion of Treasury bonds (half by official investors such as central banks). That is about a third of the total held by the public.

The federal budget deficit is running at around $2 trillion a year, or 7% of gross domestic product, and Senate Republicans just passed a budget resolution that would continue outsize deficits for the foreseeable future.

So the U.S. needs foreigners to keep rolling over the bonds they hold, and buying new ones. Even a small pullback would cause yields to jump.

Jay Barry, head of global rates strategy at JPMorgan Chase, estimates that yields rise a third of a percentage point for each $300 billion decline in foreign official holdings of Treasurys.

There were recent fears that China might try to retaliate against Trump’s tariffs by selling some of its own bondholdings. There is no evidence that it has, but the possibility has highlighted the risks to the U.S. of a trade war morphing into financial war.

In 2022, the U.K.’s new prime minister, Liz Truss, proposed a steep tax cut. British bond yields immediately skyrocketed, the tax cut was withdrawn, and Truss resigned.

The dollar’s reserve status was long assumed to insulate the U.S. from such a fate. Events of the past few weeks suggest Trump shouldn’t take that for granted.

Treasuries Suddenly Trade Like Risky Assets In Warning To Trump

Billed on Wall Street as so rock-solid safe they’re risk-free, US Treasury bonds have long served as first port of call for investors during times of panic.

They rallied during the global financial crisis, on 9/11 and even when America’s own credit rating was cut.

But now, as President Donald Trump unleashes an all-out assault on global trade, their status as the world’s safe haven is increasingly coming into question.

Yields, especially on longer-term debt, have surged in recent days while the dollar has plunged. Even more disconcerting is the pattern of the recent market moves.

Investors have often dumped 10- and 30-year Treasuries — pushing prices down and yields up — at the very same time they frantically sold stocks, crypto and other risky assets. The inverse is also true, with Treasuries rising in unison with them.

They are trading, in other words, a little like a risky asset themselves. Or, as former Treasury Secretary Lawrence Summers says, like the debt of an emerging-market country.

Even if this dynamic was to fade as swings in stocks eventually normalize, as most analysts expect, a message has been delivered to policymakers in Washington: Investor confidence in US bonds can no longer be taken for granted — not after a years-long borrowing binge that swelled its debt load and not with a president in the White House hell-bent on rewriting the rules at home and abroad and antagonizing, in the process, many of the country’s biggest creditors.

This has profound implications for the global financial system. As the world’s ‘risk-free’ asset, Treasuries are used as a benchmark to determine the price of everything from stocks to sovereign bonds to mortgage rates, while serving as collateral for trillions of dollars of lending a day.

Treasuries and the dollar get their strength from “the world’s perception of the competence of American fiscal and monetary management and the solidity of American political and financial institutions,” said Jim Grant, founder of Grant’s Interest Rate Observer, a widely followed financial newsletter. “Possibly, the world is reconsidering.”

Friday was more evidence of the same. As US stocks opened the session lower, 30-year yields were surging, touching as high as 4.99%. As shares advanced into the afternoon session, long bonds rallied in tandem.

“Treasuries are not behaving as a safe haven,” said ING rates strategist Padhraic Garvey. “If we were to slip into recession there is a path there for yields to revert lower. But the here and now is painting Treasuries as a tainted product, and that’s not comfortable territory. Treasuries have proved to be a pain trade too.”

“Treasuries are losing their haven status. Capital is leaving the US at an increasing rate as the dollar’s reserve-currency standing is diminished, and the risk of a recession raises the likelihood of an inflation-stoking double-digit fiscal deficit.”

Simon White, Macro Strategist

Not everyone is convinced that investors are losing faith in the safety of US government debt.

Benson Durham, head of global asset allocation at Piper Sandler and a former Federal Reserve economist, has done his own analysis comparing key Treasury-market metrics to those in Europe.

Some measures suggest investors have demanded less of a premium to own US debt relative to German and UK bonds in recent days, he said.

“People are right to kind of worry about this general economic management,” Durham said. But “it’s not clear to me, at least not yet, that this is an episode where people are particularly penalizing US assets.”

There are suggestions in markets, albeit lacking the hard evidence to back them up, that Treasuries may have fallen because China is selling or shunning them.

Some debate whether Beijing might eventually dump US debt as a response to the US tariffs.

Others say more technical factors are behind the selloff in the long-end. There are signs that hedge funds have been unwinding leveraged trades that capitalize on price differences between Treasuries and interest-rate swaps or futures contracts.

Treasury Secretary Scott Bessent backed that view in an appearance on Fox Business earlier this week.

“I believe that there is nothing systemic about this — I think that it is an uncomfortable but normal deleveraging that’s going on in the bond market,” said Bessent, who on taking office advertised lower 10-year borrowing costs as an ambition.

An auction of 30-year bonds on Thursday also saw investors snap up $22 billion of the debt, supporting the argument that Treasuries continue to be attractive even during the selloff.

That’s not to say that markets are behaving as usual, however.

US stocks have plunged 7% since Trump announced plans to ramp up tariffs on dozens of countries on April 2. Since then, rather than tumble, 30-year yields have actually risen around 40 basis points, only the fifth time in data going back to the 1970s that moves of this magnitude have occurred simultaneously.

The surge in yields poses a risk to Trump’s stated goal of cutting taxes while reining in the budget deficit, and was at least in part behind his decision Wednesday to announce a 90-day pause on higher tariffs for dozens of countries.

“Long-term interest rates are gapping up, even as the stock market moves sharply downwards,” Summers, who is also a paid Bloomberg contributor, wrote this week in a social media post.

“We are being treated by global financial markets like a problematic emerging market,” he said, adding that “this could set off all kinds of vicious spirals, given government debts and deficits and dependence on foreign purchasers.”

If foreign investors do decide to continue retreating from US assets, the pain could be substantial.

They hold about $7 trillion in Treasuries, $19 trillion of equities and $5 trillion of corporate debt, accounting for about 20% to 30% of the total market, according to Torsten Slok, chief economist at Apollo Global Management Inc.

If recent history is any guide, a buyers’ strike may have long-lasting repercussions for US borrowing costs.

Just three years ago, investor pushback against UK Prime Minister Liz Truss’ unfunded tax cuts fueled a surge in yields the country has yet to recover from, while the pound never bounced back from 2016’s Brexit vote.

“There is a distrust by the market created by the on-off tariffs, and that definitely adds an uncertainty premium,” said Shamil Gohil, a portfolio manager at Fidelity International.

“Large fiscal deficits will lead to continued concerns on debt sustainability which will likely require some risk premium to hold Treasuries.”

Nathan Thooft, a senior portfolio manager at Manulife Investment Management, said Treasuries still dominate global markets in terms of quality and depth, but acknowledged that recent events have chipped away at investor confidence.

“Much of the challenge we have seen over the last decade have been policy dynamics or geopolitical dynamics that were driven outside of the United States,” he said.

“It’s a different dynamic this time, which is causing people to be less confident in US assets, both on the equity side and on the fixed-income side. There has probably been some permanent damage.”

It’s also different this time because the Fed, worried about how tariffs could fuel a jump in inflation, is less likely to bail out the bond market by lowering rates anytime soon.

“You can’t count on” long-term Treasuries as a hedge, said Russell Brownback, a portfolio manager at BlackRock Inc. “That is the fixed-income regime we are in now.”

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