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.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell