US Treasury Supply To Drop In 2016

Lost in the debate over the U.S. Treasury market’s resilience as the Federal Reserve starts to raise interest rates is one simple fact: supply is falling — and fast.

Net issuance of U.S. notes and bonds will tumble 26 percent next year, according to estimates by primary dealers that are obligated to bid at Treasury debt auctions. The $433 billion of new supply would be the least since 2008.

While a narrowing budget deficit is reducing the U.S.’s funding needs, the Treasury has shifted its focus to T-bills as post-crisis regulations prompt investors to demand a larger stock of short-term debt instead. The drop-off in longer-term debt supply may keep a lid on yields, providing another reason to believe Fed Chair Janet Yellen can end an unprecedented era of easy money without causing a jump in borrowing costs that derails the economy.

“Longer-term yields will be slower to move up next year because the Treasury will be funding more with bills,” said Ward McCarthy, the chief financial economist at Jefferies Group LLC, who has analyzed U.S. debt markets for over three decades and was a senior economist at the Richmond Fed. “There is also a global appetite for Treasuries as U.S. debt is one of the world’s highest-yielding and is among the most liquid markets.”

Excluding bills, Jefferies forecasts net issuance of $404 billion in 2016, down from their $607 billion estimate for this year.

Of the ten estimates compiled by Bloomberg, the Bank of Montreal was the lone primary dealer calling for an increase in 2016. Net issuance of interest-bearing securities, or those with maturities from two years to 30 years, has fallen every year since the U.S. borrowed a record $1.61 trillion in 2010, data compiled by the Securities Industry and Financial Markets Association show.

Bloomberg

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.