The Shrinking Deficit Means Fewer New Bonds

Gluskin Sheff’s David Rosenberg is convinced that the 30-year bull market in US treasuries still has room to run.

One key reason: supply and demand in the bond market.

In a note Tuesday, Rosenberg highlighted that because the federal budget deficit is shrinking, there is less need for the government to borrow money by issuing bonds.

And at the same time, demand for treasuries is robust.

“Net new Treasury issuance has come down in the past year to around $US600 billion at an annual rate from $US800 billion, and yet the institutional demand for duration and the central bank and sovereign wealth fund buying activity have surpassed this supply by an estimated 25%,” Rosenberg wrote.

US treasuries are considered the safest asset class in the world. The search for yield is also boosting bond buying as yields around the world shrink. Rosenberg notes that the Spanish 10-year bond for instance traded at 1.6%, or 30 basis points below treasuries.

Commercial banks have become huge buyers of treasuries, so huge that the amount of government debt they bought in the past year outpaced the amount of credit they issued to the household sector.

So with demand outpacing supply, yields are likely to stay low, and that’s bullish for bonds.

Rosenberg has previously warned that the surge in bond prices might be the beginning of a bubble in the market.

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