On April 15th, Caixin News Agency reported that the recent surge 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 bond, presented a completely different depression scene.
A series of weak auction performances of US treasury bond bonds have aroused investors' concern that the market will be unable to absorb a large number of issued treasury bond.
In the past week, after the auction demand of 10-year treasury bond bonds with a scale of US $39 billion was weak, the bond market selling tide caused by the higher than expected CPI in March of the United States intensified. Investors are also less interested in the auction of three-year and 30-year US bonds.
Behind the increasing caution of bond market investors, more and more people are starting to believe that US inflation is not yet fully under control, and the Federal Reserve will maintain interest rates at decades high levels in the coming months or even years. The benchmark for pricing borrowing rates, from mortgage loans to corporate loans - known as the "anchor of global asset pricing" - the 10-year US Treasury yield closed around 4.5% last week, close to the high level of 5% hit in October last year.
At the same time, the US government is also preparing to sell another $386 billion worth of bonds in May - Wall Street predicts that regardless of who wins the November presidential election, the US government will continue to issue large amounts of bonds. Although few people worry that these bond auctions will fall into failure completely, many people have begun to worry that the oversupply of treasury bond will shake other areas of the U.S. market, raise government borrowing costs and ultimately damage the economy.
James St. Aubin, Chief Investment Officer of Sierra Mutual Funds, said, "There has been a significant shift in market sentiment. The CPI report has changed people's perception of the direction of Federal Reserve policy."
Is it increasingly difficult to maintain the issuance of Tianliang US bonds?
The US government sells US treasury bond bonds, known as "the safest bond in the world", to investors and trading marks through regular auctions to fund its daily operations. Since the outbreak of the COVID-19 pandemic, the issuance of US treasury bond has been surging in the past few years.
In the first three months of 2024, the U.S. government sold a total of $7.2 trillion of treasury bond, the largest quarterly total ever recorded - even more than the second quarter of 2020 at the beginning of the epidemic, when the government was eager to provide funds for the COVID-19 stimulus plan. This figure was also recorded on the basis of a record $23 trillion treasury bond issued last year. After repaying the maturing bonds, the US government raised an additional $2.4 trillion last year.
As the overall US bond market expands, the scale of auctions is also expanding. In a series of auctions at the end of last year, poor demand has already made many investors feel uneasy. The US Treasury Department has alleviated some investors' concerns by shifting its focus to short-term debt issuance to finance the US deficit. This has played a role to some extent, as the Federal Reserve has also signaled a shift towards loose monetary policy: hope that interest rate cuts will soon come, giving investors a lot of peace of mind about the Treasury's strategy.
But now, these hopes are weakening, and it is expected that the Ministry of Finance will announce its third quarter borrowing plan by the end of April.
According to the independent Congressional Budget Office, the deficit will increase from 5.6% to 6.1% of the US gross domestic product in the next decade. At that time, the size of bonds held by the public will increase from $28 trillion to $48 trillion, much higher than the $13 trillion held 10 years ago.
Wall Street expects that the US Treasury Department will not increase the auction size of longer-term bonds and bonds until next year. But the government must also refinance most of its bonds. According to the data of Torsten Slok, chief economist of Apollo Global Management, the record US $8.9 trillion treasury bond will mature in 2024, accounting for about one-third of the outstanding US debt.
Investors are also paying attention to how revenue from the upcoming tax season can boost the US Treasury in the coming weeks. "As individuals and businesses come up with funds to pay taxes, we have been losing liquidity. We are in a bubble that allows the bond market to float more freely and yields to rise," said Thomas Tzitsouris, head of fixed income research at Strategas
Where is the future going?
Of course, there are also some people who still believe that the US bond market has not completely reached the point of exhaustion.
For example, the Federal Reserve may provide "support". The minutes of the Federal Reserve's March meeting released last week showed that policymakers are seeking to slow down the pace of the Fed's significant reduction in holdings of bonds accumulated to boost the economy. Since the middle of 2022, the Federal Reserve has allowed up to US $60 billion of US treasury bond bonds and US $35 billion of institutional mortgage-backed securities (MBS) to expire unsuccessfully every month to reduce its balance sheet. Some investment banks have predicted that the Federal Reserve will halve the QT rate of treasury bond bonds to $30 billion a month.
As the Federal Reserve prepares to slow down the QT, or even completely stop the plan at a certain point in the future, investors may only need to absorb a smaller net share of US treasury bond bonds in the future. This may support bond prices and eliminate some upward pressure on yields.
Another factor that may be expected to support US treasury bond bonds is that global investors have a lot of savings, but there are few feasible investment options. Both the eurozone and Japan have current account surpluses, which means they receive more funds from trade than from import expenditures. US treasury bond bonds provide them with a safe place to store cash and can earn a yield of more than 4%. It also provides the simplest way to invest in US dollar denominated income in trade with the United States.
At present, both the euro and the yen are depreciating relative to the US dollar, partly due to the Bank of Japan still keeping interest rates low, and investors expect the European Central Bank to cut rates significantly soon. This may increase the demand for US bonds - the yield of US treasury bond bonds is still high relative 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 target of 2%, the US treasury bond bond yield will remain below 5%.
At the same time, however, some people are still worried that the influx of newly issued treasury bond will add to the already turbulent market, especially when inflation remains sticky. After the CPI report and the weak US bond auction last Wednesday, the yield of 10-year treasury bond hit the biggest one-day increase since 2022, jumping by about 20 basis points.
Sierra's St Aubin said, "If we continue to see hot inflation data, it will keep many people on the sidelines."