Everywhere you turn, the biggest players in the $23.7 trillion US Treasuries market are in retreat.
From Japanese pensions and life insurers to foreign governments and US commercial banks, where once they were lining up to get their hands on US government debt, most have now stepped away. And then of course there’s the Federal Reserve, which a few weeks ago upped the pace that it plans to offload Treasuries from its balance sheet to $60 billion a month.
If one or two of these usually steadfast sources of demand were bailing, the impact, while noticeable, would likely be little cause for alarm. But for every one of them, all at once, to pull back is an undeniable source of concern, especially coming on the heels of the unprecedented volatility, deteriorating liquidity and weak auctions of recent months.
The upshot, according to market watchers, is that even with Treasuries tumbling the most since at least the early 1970s this year, more pain may be in store until new, consistent sources of demand emerge. It’s also bad news for US taxpayers, who will ultimately have to foot the bill for higher borrowing costs.
“We need to find a new marginal buyer of Treasuries as central banks and banks overall are exiting stage left,” said Glen Capelo, who spent more than three decades on Wall Street bond-trading desks and is now a managing director at Mischler Financial. “It’s still not clear yet who that will be, but we know they’re going to be a lot more price sensitive.”
To be sure, many have predicted Treasury-market routs over the past decade, only for buyers (and central bankers) to swoop in and support the market. Indeed, should the Fed pivot away from its hawkish policy tilt as some are wagering, the brief rally in Treasuries last week may be just the beginning.
But analysts and investors say that with the fastest inflation in decades hamstringing the ability of officials to loosen policy in the near term, this time is likely to be much different.
‘Massive Premium’
The Fed, unsurprisingly, represents the largest loss of demand. The central bank more than doubled it’s debt portfolio in the two years through early 2022, to in excess of $8 trillion.
The sum, which includes mortgage-backed securities, could fall to $5.9 trillion by mid-2025 if officials stick with their current roll-off plans, Fed estimates show.
While most would agree that lessening the central bank’s market-distorting influence is healthy in the long run, it nonetheless is a stark reversal for investors who have grown accustomed to the Fed’s outsized presence.