Beginning in early August, market participants began to obsess over the shifting buyer base for US Treasurys.
The narrative is a simple one, even if the discussion itself is as deep as the Treasury market is supposed to be. Price-agnostic buyers, including and especially the Fed, are stepping away just as supply ramps up, leaving price-sensitive investors to absorb more issuance. In other words, price discovery is back. That, at a time when ratings agencies are starting to ask uncomfortable questions about US government dysfunction.
The selloff witnessed at the long-end of the Treasury curve from late-July through October was accompanied by a rapid repricing of the term premium. When taken in conjunction with additional evidence of Beltway paralysis, the optics weren’t great.
The situation turned around in November, when the refunding announcement featured smaller-than-expected coupon increases, an apparent nod to investor concerns. And yet, as evidenced by mixed supply reception since then (including a tail at the 10-year reopening in Monday’s double-header, admittedly not the best barometer given the proximity to CPI/FOMC), it’d be a stretch to suggest the fireworks are over for good.
With that in mind, I wanted to quickly highlight the simple figure below, from JPMorgan’s 2024 US rates outlook.
As the chart header notes, that’s effectively the price-agnostic share of the market. And it’s dropped to the lowest level in two decades.
To be clear: This is a highly nuanced discussion, which is to say any “snapshot” is just that — a snapshot, nothing more, nothing less. But the figure does illustrate the overarching, high-level concern regarding the buyer base. The market is now a market again (or more of a market than it’s been in quite a while), which means it has to find a clearing price.
I’ll leave you with the summary version of JPMorgan’s demand outlook for Treasurys in 2024:
Following two decades of strong support from the Fed, foreign investors and US banks at various points, the price insensitive share of Treasury market ownership declined to its lowest level since the turn of the century. Over time, we see this share continuing to decline, and against the backdrop of increasing duration supply, we think this will contribute to higher term premium and steeper curves. Starting with the Fed, we expect SOMA Treasury holdings to decline by an additional $720 billion in 2024, as RRP balances can continue to decline organically amid abundant supply of T-bills. We expect very modest commercial bank demand, given the combination of weak deposit growth and a preference for loans over securities. Foreign investors should be small net buyers: While we expect foreign official Treasury holdings to decline further in 2024 given declining EM FX reserves, foreign private investors should provide some support, as Treasurys now look more attractive on a FX-hedged basis than they did earlier this year. The pension fund community should provide some support, as funded ratios remain above 100%, particularly if the stock-bond correlation flips once again. Meanwhile, we see room for bond fund demand to firm, given outright yield levels, and particularly after fixed income returns stabilize and the portfolio construction benefits of core fixed income become clear once again. Finally, money market funds will remain important buyers, given attractive T-bill valuations and negative FHLB issuance.
