There’s this fairytale that continues to spread out there that the reason bonds have sold off is that the government is issuing too much debt, and won’t be able to get its future deficits under control.
See Liam Halligan at The Telegraph, who writes hilariously: “…as of last week, the Western government debt debacle has entered the big league.”
Far more interesting is SocGen’s take, which is that actually the US isn’t issuing enough debt, especially with the Fed scarfing up so much Treasury issuance:
With the US federal government still producing fat deficits,
there is no shortage of Treasury supply. We expect net
issuance of coupon and TIPS in H1 to be in the region of
$690bn (new cash). But the Fed has planned to buy back
some $660bn over the same period – unless it decides to
scale back QE2 (which we do not believe it will do). So
issuance net of redemption and Fed buying will be
microscopic (0.4% of GDP). Yet there are buyers lining up
behind the Fed.
– Emerging market central banks, particularly in Asia, may
accept a slightly larger degree of currency appreciation going
forward (inflation fighting) but will continue to intervene, and
place their proceeds in western bonds.
– Banks likely will continue to crave safe government bonds.
New liquidity standards in particular will force banks to hold
more assets that could be liquidated rapidly (liquidity
coverage ratio to be introduced in 2015, but observation
starts in 2011). Both the economic cycle and regulation are
likely to give government bonds a more prominent place in
– Outflows from money markets continue, and bond funds still
benefit (see for instance European flows analysis here7).
So we find supply-demand supportive for now. That may
change after the spring, and we fear that private investors will
then be far more price sensitive than the likes of the Fed and
Asian central banks. That is when the threat of a Treasury sell-
off likely will grow. Don’t go short too early.
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