JPMorgan’s 2018 net issuance tally of $1.3 trillion includes $847 billion of coupon debt, ballooning from an estimated $409 billion this year amid a darkening fiscal backdrop. The federal deficit may exceed $1 trillion by fiscal 2020, from about $666 billion in 2017, according to the most dire estimates by primary dealers. Meanwhile, the Fed could roll off about $250 billion of Treasuries in 2018.
The catch is that demand from China, which with almost $1.2 trillion of U.S. government debt is America’s biggest foreign creditor, may be about to ebb. The bulk of China’s buildup came as it boosted foreign-exchange reserves to help offset a strengthening yuan. But some forecasters see yuan stability in 2018, meaning limited need for currency intervention.
Pension Needs
It’s not just the household sector that would need to step up should China back away.
Pension funds, which held about $2.3 trillion of Treasuries as of September, are set to add more in 2018 as they shift their focus from equities and corporate debt given stretched valuations, Societe Generale strategists predict.
The net purchases by pensions, along with insurance companies and state and local-government retirement funds, should rise to $110 billion in 2018, versus $90 billion this year, JPMorgan forecasts.
Private and public pensions’ holdings increased in the third quarter by $266 billion after falling in the first half of the year, Fed data show.
“The defined-benefit pension plans are going to be buying a lot more long-term Treasuries,” said Guy Haselmann, a managing director at OpenDoor Trading LLC, a Treasuries trading platform. Private pensions are trying to avoid penalties related to being underfunded, he said.
