Will US Bond Market Boom Anyway?
The US bond market is expected to thrive. But, the Treasury Department now has to sell more debt in order to finance the government's growing deficit. Bond yields stayed in limited diapason, showing that investors aren’t bothered by a growing debt supply.
Tom Simons (money market strategist at Jefferies & Co in New York) noted: "There will be no relief from supply especially from bills going into October". Overall, the supply is projected to keep rising. The Treasury is going to sell 34 billion dollars in 3-year notes this week. It will also auction 51 billion dollars in 3-month bills, 45 billion dollars in 6-month bills as well as 65 billion dollars in 1-month bills.
Economists now say the government is getting more dependent on private investors for cash as the Fed keeps lowering its bond holdings as part of the balance sheet reduction. But, some analysts see no threat. Head of fixed income strategies at Calamos Investments in Chicago, Matt Freund told: "I think they will go fine".
The bigger danger, though, is growing debt load. Trade war with China and Fed’s rate hikes make that danger even more pressing. Matt Freund claimed: "It is a really, long-term powerful narrative, but when is it going to bite?".
On Friday, benchmark 10-year Treasury yield dropped more than 3 bps to 2.952%. The U.S. 10-year yield is now 2.50 pp higher than its German peer and 2.85 points above the Japanese 10-year yield. The Congressional Budget Office expects U.S. budget spread to reach 1 trillion dollars in 2020. On this rising deficit, the government has raised its issuance of bills and shorter-dated coupon debt.