US Treasury bonds: Supply on the up and no lack of buyers to date

At the end of 2017 a tax reform was resolved in the US hinging on tax cuts for private individuals and corporations alike. US tax revenues for the 2017-8 fiscal year dropped accordingly. At the same time, government spending remained high. The budget deficit has therefore grown and after the first nine months of the fiscal year amounts to USD 607 billion; in fiscal 2016-7 the figure came to USD 521 billion at the same point in time, while one year earlier it had been USD 417 billion. The budget deficit has risen from 3.6% in the 2017 calendar year to around 4.5% in 2018. A growing budget deficit, which at the same time spells more sales of US Treasury bonds, would be one factor that can send the yield on the bonds northwards. As a result, the demand for US bonds will dip as investors will fear that an exaggerated level of debt may gain sway in the USA. For about a year, the volume of US Treasuries issued (fixed-income securities) has increased across all maturities. In particular, the monthly placements of two-year bonds have surged.

Several factors could theoretically lead to buyer-side interest in the US Treasury bond auctions dwindling. They include, for example, rising budget deficits, owing to which the supply of US Treasury bonds rises, moderate yield increases in competing markets (e.g., Bunds) or greater political risks attributable to the current US Administration. Not least, China might in the course of the present trade conflict lower its purchases of US Treasury bonds (although there have not yet been any signs of this so far this year). Some pundits fear that buyer-side interest in US government bonds may cool and send the yields on the bonds skywards as the US Treasury will be forced to place them on the market to finance the deficit.

The current strength of the US economy and a more restrictive monetary policy on the part of the Fed have pushed the yields on US Treasury paper upwards for some time now – yet investors have thus far not been deterred by this. In fact, a glance at the various key variables (e.g., the ratio of bids submitted and allocations, not to mention buyer-side interest among direct and indirect bidders as well as traders in the primary market) shows that the US Treasury is apparently still able to find sufficient buyers for its bonds and can finance itself at a rate of interest that is not overly high.

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