Finance Association, April 15 (Editor: Xiaoxiang) Recently, the sharp rise in international gold prices has almost attracted the attention of investors around the world. Behind the frenzied gold market buying, another safe-haven asset, US Treasury bonds, presented a completely different scene of depression.

A series of weak US Treasury bond auctions have aroused investors' concerns — they are increasingly worried that it will be difficult for the market to absorb large amounts of issued treasury bonds.

Over the past week, after weak demand for 10-year treasury bond auctions worth 39 billion US dollars, the wave of bond sell-off triggered by the higher than expected US CPI in March intensified. Investors also have little interest in the bid sale of three-year and 30-year US bonds.

Behind the increasing caution of investors in the bond market, more and more people are beginning to believe that US inflation has not been fully controlled and that the Federal Reserve will keep interest rates high for decades in the coming months or even years. The interest rate pricing benchmark for loans from mortgages to corporate loans — the 10-year US Treasury yield, known as the “anchor of global asset pricing,” closed around 4.5% last week, close to the high level of 5% that hit the 5% mark in October last year.

Meanwhile, the US government is also preparing to sell another $386 billion worth of bonds in May — Wall Street expects that no matter who wins the November presidential election, the US government will continue to issue large amounts of bonds. Although few people worry that these bond bids will completely fail, many people have begun to worry that the oversupply of treasury bonds will destabilize other areas of the US market, increase government borrowing costs, and ultimately damage the economy.

James St. Aubin, Chief Investment Officer of Sierra Mutual Funds, said, “The market's rhetoric has changed a lot. The CPI report changed everyone's views on the direction of the Federal Reserve's policy.”

Is the Tianliang US bond issuance becoming more difficult to maintain?

The US government sells US Treasury bonds, known as “the safest bonds in the world,” to investors and traders through regular auctions to fund its day-to-day operations. And since the outbreak of the COVID-19 pandemic, the issuance of US Treasury bonds has been surging over the past few years.

In the first three months of 2024, the US government sold a total of $7.2 trillion in treasury bonds, the largest quarterly total on record — even surpassing the second quarter of 2020 at the beginning of the pandemic, when the government was rushing to fund the COVID-19 stimulus plan. This figure is also based on the record issuance of 23 trillion US dollars of treasury bonds last year. After repaying maturing bonds, the US government raised a total of 2.4 trillion US dollars in additional capital last year.

As the overall size of the US bond market expands, so does the scale of bidding. In a series of auctions at the end of last year, poor demand already made many investors uneasy. The US Treasury relieved some investors' concerns by shifting to a model based on short-term debt issuance to finance the US deficit. This played a role to a certain extent, because the Federal Reserve also sent a signal to switch to a loose monetary policy: the hope that interest rate cuts will soon arrive, reassuring investors quite a bit about the Treasury's strategy.

But now, those hopes are waning, and the Ministry of Finance is expected to announce the third quarter loan plan at the end of April.

According to the non-partisan Congressional Budget Office, the deficit will increase from 5.6% to 6.1% of the US GDP over the next decade. At that time, the size of bonds held by the public will increase from 28 trillion US dollars to 48 trillion US dollars, far higher than 13 trillion US dollars 10 years ago.

Wall Street anticipates that the US Treasury will not increase the auction scale for longer-term bonds and bonds until next year. But the government must also refinance most of its bonds. According to Torsten Slok, chief economist at Apollo Global Management, a record $8.9 trillion US Treasury bonds will expire in 2024, accounting for about one-third of America's outstanding debt.

Investors are also watching how the next few weeks of tax season revenues can boost the US treasury. Thomas Tzitzouris, head of fixed income research at Strategas, said, “As individuals and businesses use capital to pay taxes, we have been losing liquidity. We are in an airbag that allows the bond market to float more freely and yield to rise.”

Where does the future go?

Of course, there are also people who still believe that the US debt market has not completely reached the point of exhaustion.

The Federal Reserve, for example, might provide “support.” The minutes of the US Federal Reserve's March meeting released last week show that policymakers are seeking to slow down the pace of reducing the large amount of bonds the Federal Reserve has accumulated to boost the economy. Since mid-2022, the Federal Reserve has allowed up to $60 billion of US Treasury bonds and $35 billion of institutional mortgage-backed securities (MBS) to expire each month to shrink its balance sheet. Some investment banks have anticipated that the Federal Reserve will cut the QT rate of treasury bonds in half to 30 billion US dollars per month.

As the Federal Reserve prepares to slow down QT and even completely stop the program at some point in the future, investors may only need to absorb a smaller net share of US Treasury bonds in the future. This could support bond prices and remove some upward pressure on yields.

Another factor that may be expected to support US Treasury bonds is that global investors have large savings, but few viable investment options. Both the Eurozone and Japan have current-account surpluses, which means they receive more money from trade than they spend on imports. US Treasury bonds provide them with a safe place to store their cash and receive a yield of over 4%. It also provides the easiest way to invest in dollar-denominated income from trade with the US.

Currently, both the euro and yen are depreciating against the US dollar, partly because the Bank of Japan is still keeping interest rates low, and investors expect the ECB to cut interest rates sharply soon. This is likely to increase demand for US bonds — US Treasury yields are still high compared to other global bonds.

This has led many bond market bulls to believe that as long as inflation continues to move towards the Federal Reserve's 2% target, the yield on US Treasury bonds will remain below 5%.

At the same time, however, some people are still worried that the influx of newly issued treasury bonds will exacerbate an already volatile market, especially as inflation remains sticky. After last Wednesday's CPI report and weak US bond bid, the 10-year Treasury yield recorded the biggest one-day increase since 2022, jumping about 20 basis points.

Sierra's St. Aubin said, “If we continue to see hot inflation data, this will keep many people on the sidelines.”

Editor/Somer