The U.S. Treasury is expected to confirm next Wednesday, Jan. 31, further increases in government bond supply in its first quarterly refunding announcement of 2024. But is demand sufficient for the government to auction the debt at top prices and comfortable yields?
Treasury demand dropped off sharply at the beginning of the final quarter in 2023 as top foreign buyers such as China and Japan focused their energies on their own debt in support of their capital markets and currencies.
At this point yields began to move higher, peaking in mid-October at above 5%. The benchmark 10-year yield peaked at 5.021% on Oct. 23.
Subsequently, as markets became aware that the Federal Reserve’s rate hike cycle had peaked, bond yields fell sharply. Demand for Treasuries began to return as hopes improved that an economic slowdown wouldn’t deteriorate into recession.
“Last fall, the U.S. Treasury market was dominated by one question: who will buy the bonds?,” said Mark Cabana, rates analyst at Bank of America. “At that time U.S. data was hot, Fed hikes were in play, term premium measures were rising, Treasury demand was tepid.”
Treasury Demand Returns
But what a difference a season makes. As fall turned into winter, demand for Treasuries improved.
“The shift in Treasury demand is fundamentally rooted in improved macro confidence and growing Fed rate cut expectations,” said Cabana. “And the January Treasury refunding announcement will not rock this boat.”
Treasury refunding is an important part of government financing. As Treasury bonds mature to their duration — whether that be two, five, 10 years etc. — the government must pay the bondholder the current market price value of the bond.
Billions of dollars worth of government debt expires like this every year and the government must issue more debt to pay it down.
January Refunding
Cabana’s team at BofA believes the Treasury will deliver a repeat of the increase in auction sizes announced in November.
This saw increases in the two- and five-year Treasuries of $3 billion per month; the three-year by $2 billion per month and the seven-year by $1 billion a month.
It also increased both the new issue and the…
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