UBS’s Maury Harris, who is frequently recognised as the most accurate economist on Wall Street, shared an important chart with Business Insider when we had lunch with him last week.
It compares the year-over-year change in U.S. Federal government debt and home mortage debt for each year since the heyday of the housing bubble.
“Over the past 6 years, an around $1 1/8 trillion downsizing in per annum net home mortgage financing has accompanied an around $7/8 trillion upswing in federal borrowing per annum,” said Harris. In other words, the size of the mortgage bond market has shrunk by much more than the Treasury bond market has grown.
Back when the U.S. housing market was booming, the mortgage bonds it generated was an enormous source of fixed-income securities for investors. Today, with home prices way down and home purchases only beginning to recover, the size of the mortgage bond market is only a fraction of what it used to be.
Meanwhile, data suggests that demand for bonds is only growing.
“Federal borrowing is ‘filling in’ instead of ‘crowding out,'” said Harris.
You could actually argue that there isn’t enough debt out there going around.
Harris believes that the tight supply in the bond market will keep investors buying Treasuries for years.
This dynamic should quell some fears that demand for Treasuries will just disappear and send borrowing costs/interest rates surging in the near-term.
Disappearance of “Bond Market Vigilantes”