Many analysts see pensions and their quest to add duration as having helped fuel this year’s dominant bond-market phenomenon -- the relentless flattening of the yield curve. Their demand is also evident in the surging amount of notes and bonds split into principal- and interest-only securities, known as Strips.
Banks’ Return
U.S. banks, which are on pace to lighten up on Treasuries in 2017 for the first time in four years, should increase holdings next year by roughly $150 billion, Credit Suisse forecasts. That’s partially due to the fact that the Fed’s tapering will reduce bank reserves, pushing these firms to buy more Treasuries to replenish holdings of high-quality liquid assets.
The wave of supply and the questions about demand come amid expectations for higher yields with the prospect of quicker U.S. growth and inflation. The Fed projects three more rate hikes in 2018, and firms including Goldman Sachs Group Inc. predict 10-year yields will rise to 3 percent in a year, from 2.46 percent now.
“There should be some overall repricing of yields higher, albeit modestly, on the back of the rising supply picture,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale. “The amount of the supply increase will be quite large, and it’s not clear how much support is going to come from overseas.’’
This article was provided by Bloomberg News.