So-called auction tails, which occur when yields on debt issued at auction exceed prevailing levels in the market at the time of sale, have become more common as well. In layman’s terms, it’s a sign investors need to be paid more to take on new debt. That’s been true especially for longer-maturity debt, like the 10-year note and the 30-year bond.
“The debt has become more difficult to digest as the rise in Treasury issuance is outpacing the rise in demand, and overall there’s been a decline in recent years in foreign demand,” Canavan said.
There’s little to suggest the U.S. will suddenly decide to embrace fiscal restraint, either under Trump or a Democratic administration.
So for many market watchers, the most likely near-term solution to the supply problem is for the Fed to start increasing its debt purchases in a systematic way once more. (Following the recent repo turmoil, the Fed has been providing repo financing on a temporary basis.)
Historically, pumping lots of cash into the system has come with the risk of spurring too much inflationary pressure. But after a decade of ultra-low inflation, that isn’t much of a concern today. The purchases would not only replenish bank reserves and help dealers off-load Treasury collateral, but it would also keep a lid on funding costs as the U.S. runs up the deficit.
Former Fed officials Joseph Gagnon and Brian Sack say the central bank should buy enough Treasuries to build up a buffer of extra reserves, with outright purchases totaling $250 billion over the next two quarters.
“More Fed buying may finally give some relief to the supply issues that the market so needs,” Vogel said.
When it comes to financing America’s deficit though, it’s not the Fed that Julius Baer’s Markus Allenspach is worried about.
“There’s going to be saturation by investors at some point,” said Allenspach, head of fixed-income research and a member of the firm’s investment committee. “Yes, there is a global search for yield, but we believe we may be past the peak of this hunt for safe assets.”
This article provided by Bloomberg News.