Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit.
While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at Bank of America Merrill Lynch in New York.
Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 per cent from a year earlier to $8.18 trillion. Last week, the US government auctioned $34 billion of three-year notes at a yield of 0.844 per cent, the lowest ever for that maturity.
“The number-one fixed-income conundrum is ‘Where do I go?’” said Mitchell Stapley, the chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion in assets. In credit markets, “the supply of sleep-at-night quality bonds has just collapsed,” he said in an interview from Grand Rapids, Michigan.
Less competition for bondholders’ funds may make it easier for Obama to finance future stimulus needed to boost the economy after the Federal Reserve said on August 10 that the pace of the “recovery is likely to be more modest in the near term than had been anticipated.”
Room for more
While the Treasury sold $74 billion of bonds last week, yields on 10-year notes declined 14.5 basis points, or 0.145 percentage point, to 2.675 per cent in New York, according to BGCantor Market Data. The price of the 2.625 per cent note due August 2020, which was auctioned August 11, ended at 99 19/32.
The yield fell to 2.63 per cent as of 12:11 pm in London.
“It would seem there’s room for the federal government to raise more debt,” said John Lonski, the chief economist at Moody’s Capital Markets Group in New York.
Net issuance of asset-backed securities, after taking into account re-invested coupons, will decline by $684 billion this year, according to Bank of America’s Rosenberg.
