In a recent report by the Treasury Borrowing Advisory Committee (TBAC), it has been revealed that demand for US Treasury bonds is starting to weaken among investors. This comes at a time when the federal government is increasing the supply of US debt.
The TBAC’s quarterly report, presented to Secretary Janet Yellen on Wednesday, identifies the recent surge in US bond yields and offers explanations for this trend. Factors such as strong economic growth, a tight labor market, and expectations for future central bank policy are cited as potential drivers. However, the report also raises concerns about a growing supply-and-demand imbalance for Treasurys, fueled by ballooning deficits and the Federal Reserve’s balance sheet reductions.
The TBAC warns that “demand for US Treasuries may have softened among several traditional buyers.” It points out that the rising value of the US dollar may further pressure foreign central banks to sell Treasury bonds in order to support their own currencies.
The longer end of the debt spectrum is also in focus, with the report highlighting soft demand for 30-year bonds in a recent auction. While Treasury auctions continue to be oversubscribed, there are indications of waning demand, according to the TBAC. The report notes that while there is still “reasonable demand” from both domestic and international investors, it has not kept pace with the increase in supply.
These concerns about weakening demand for US Treasury bonds come as the Treasury Department provides updates on its borrowing plans. In October, the department expects to borrow $776 billion, with borrowing projected to climb to $816 billion in the following quarter. To refund maturing notes, the department announced plans to sell $112 billion in debt next week, raising approximately $9 billion in additional funds. The announced issuance of 10- and 30-year bonds is slightly lower than expected, and the sale of short-duration securities will increase proportionally to August’s figures.
The Treasury’s announcement had an immediate impact on yields, with the 10-year rate falling over 6 basis points to 4.812% on Wednesday. Similarly, the 30-year yield moved down from the 5% range after surpassing that threshold the previous week. It is worth noting that in August, the Treasury increased auction sizes for the first time in years, contributing to a significant bond market retreat and subsequent surge in yields.
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