America’s Bonds are Getting Harder to Sell

The recent string of disappointing auctions for U.S. Treasurys is sparking worries among investors about the market’s ability to absorb the flood of government debt headed its way. Concerns intensified after lackluster demand for various Treasury maturities, particularly following a selloff triggered by higher-than-expected inflation data. This caution stems from a prevailing belief that inflation remains unchecked and the Federal Reserve will maintain elevated interest rates for an extended period, potentially leading to prolonged market volatility.

The surge in Treasury issuance has been remarkable, with the U.S. selling a record $7.2 trillion of debt in the first quarter of 2024 alone. This massive issuance trend, which began during the pandemic, shows little sign of slowing down, with expectations of further substantial sales in the coming months regardless of the outcome of the upcoming presidential election. While a failed auction remains unlikely, the sheer volume of Treasurys flooding the market raises concerns about its impact on other sectors, potentially increasing government borrowing costs and impacting economic growth.

Despite hopes for interest rate cuts easing market concerns, dwindling expectations for such cuts coupled with the Federal Reserve’s plans to reduce its bond holdings pose challenges for investors. The prospect of increasing deficits and a record amount of Treasury bonds set to mature in 2024 add to the complexity of the situation. While some support for Treasurys may come from global investors seeking safe assets and limited alternatives, uncertainties remain regarding the potential consequences of the bond glut, especially if inflation persists at elevated levels.

Our take (from the Straight to Smart newsletter):

No Cuts as Inflation Progress Stalls

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America’s Bonds are Getting Harder to Sell

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