“It’s wrong to assume if you increase the supply of something, the price has to go down,” Major says.
He also argues that if demand for bonds isn’t keeping up with the increase in supply, governments can simply scale back the sale of longer-term securities and offer more shorter-term debt.
This is exactly what the US did when the sell-off got ugly last year. In early November, Treasury Secretary Janet Yellen slowed the increase in sales of 10-year and 30-year bonds, and opted to issue more T-bills than the market expected. The move, while not without its own set of risks, helped settle jittery investors and laid the groundwork for a bond rebound.
Analysts at JPMorgan Chase expect the Treasury to use the T-bill market for a smaller proportion of its funding in 2024. They estimate $675 billion of net T-bill sales, roughly a third of last year’s tally, but a figure that nonetheless comes on top of the forecast bump in note and bond sales.
“The Treasury has shown us that they are going to try to be pragmatic about where they issue on the curve and when,” said Rebecca Patterson, formerly chief investment strategist at Bridgewater Associates from 2020 to 2022, and an early proponent of the case for higher yields. “That’s reassuring at the margin but it doesn’t change the bigger picture. The supply of debt we need to issue to fund the government spending and to fund the deficit absolutely is an ingredient in where bond yields settle.”
It’s also a driving force in how investors decide which bonds they want to own. So far, one of the big trades for 2024 is a bet that US debt with a lifespan of 10 years or more will return less than shorter-term securities, because longer-dated bonds are more sensitive to worries over the deficit.
As much as fiscal spending has surged in the US and Europe in recent years, Alex Brazier, the deputy head of BlackRock’s research arm, sees two bigger problems pushing up debt loads and wreaking havoc on the market: slowing global growth and higher benchmark interest rates.
The European Central Bank has pushed its main rate above 4% to tame the inflation surge that was triggered in part by the pandemic stimulus programs. The Bank of England and Fed have gone even higher — to over 5%. Even if they start reversing those hikes next year, as is now expected, there’s little chance of a return to anything resembling the zero-rates era that prevailed for much of the previous two decades.
This means “you can’t grow your way out of debt so much and the interest bill is bigger,” Brazier says.
In France, the finance ministry is grappling with interest payments that are forecast to exceed the nation’s defense budget this year and are set to almost double by 2027. And Australia’s government is squirreling away cash to meet its spiraling debt obligations, which will soar to a record by mid-2026.
The World Bank said in March that potential global growth, defined as the highest long-term rate at which the economy can grow without triggering inflation, is set to fall to just 2.2% a year through 2030. That’s its lowest level in three decades as investment, trade and productivity, the three forces that usually power economic expansions, all slow.
“It’s the poor macro environment,” Brazier says, “and that makes the fiscal deficit an issue.”
His recommendation to clients is simple: Stay away from long-term bonds.
This article was provided by Bloomberg News.