Control Panel: Focus on Treasury debt

All asset markets are underpinned by the money supply and the price of borrowing money. Many investors focus on the overnight fed funds rate but longer-term debt prices are set by the free market (when the Fed isn’t creating money out of thin air to buy Treasuries and mortgage debt, as it did with Quantitative Easing).

The Fed bought a huge amount of Treasuries and mortgage debt but it is gradually allowing its book to run off.

This leaves the question of who will be buying the growing mountains of Treasury debt. Supply and demand govern the price. Bond yields move inversely to price so yields rise when prices fall.

The Treasury failed to lock in ultra-low interest rates with long-term issuance when the Fed was doing ZIRP. The vast majority of Treasury debt is short-term so the impact of interest payments on the Federal budget will fluctuate. Still, quite a lot of medium-term borrowing has happened during the Covid years when Treasury yields were higher. Note the “Marketable Debt” doesn’t include the massive amount of borrowing between government agencies such as “borrowing” from the Social Security trust fund.

The $27 Trillion Treasury Market Is Only Getting Bigger

More debt, different buyers and increased regulation pose challenges

By Eric Wallerstein, The Wall Street Journal, March 24, 2024

Annual issuance of U.S. Treasurys has exploded, nearly doubling since the pandemic began. The government sold a record $23 trillion worth in 2023. And few think the spree is going to slow soon, given the widespread expectation that government spending will continue to rise regardless of who wins November’s elections.

Rapid growth in markets from tech stocks to mortgage bonds has ended badly in the past. Treasurys are considered the safest and easiest-to-trade securities on Wall Street, and many worry that any instability there could rapidly spread…

The Treasury market has grown more than 60% to $27 trillion since the end of 2019. It is roughly sixfold larger than before the 2008-09 financial crisis… [end quote]

Assets held by money-market funds surpassed $6 trillion for the first time in 4Q2023. By definition, money markets are short-term securities, 90 days or less. They hold a lot of short-term Treasury debt as well as corporate debt. Although they aren’t FDIC insured like bank accounts, no money market has ever “broken the buck” since the Fed came to the rescue during the 2008 financial crisis.

Like the Federal government itself, investors who have money in money markets can expect the yields to move rapidly when the Federal Reserve begins to cut the fed funds rate. Because of this, many bond investors (including me) build bond ladders which extend into years ahead.

It may seem like a no-brainer to invest in a long-term bond ETF like TLT, iShares 20+ Year Treasury Bond ETF, but it’s actually riskier than holding individual bonds. Bonds in a bond ladder can be held to maturity to get full principal while the Net Asset Value (NAV) of a bond fund will fall when interest rates rise so principal can be lost.

The big question is: will rising Treasury issuance and “unexpectedly” sticky inflation cause long-term bond yields to stay higher, longer than expected?

Currently, investors are confident that the Fed will be able to bring inflation to the 2% range in the long term. If you think they are overly optimistic, buy TIPS. But this is a separate issue than the market demand for Treasury debt.

If money market investors move their money into stocks when interest rates begin to fall the stock market may benefit. But there’s some evidence that money market investors tend to move their money into bond-like investments (e.g. bank CDs, etc.) rather than stocks.

The stock indexes are near a record high and the trend is rising. QQQ continues to rise although the bullish percent of the NASDAQ 100 is falling. The Shiller CAPE is near a record high.

The trade is risk-on. The Fear & Greed Index is in Greed. USD is stable in its channel. Gold has stabilized after a tremendous run up. Oil is rising above its long-term rising trend.

The Treasury yield curve rose a little and is now positively sloped from 5 to 20 years.

The Fed released its Federal Open Market Committee (FOMC) meeting projections of the most likely outcomes for real gross domestic product (GDP) growth, the unemployment rate, and inflation for each year from 2024 to 2026 and over the longer run. The updated Fed dot plot showed a projected 2.25-point interest rate cut by yearend 2026. This would reduce the fed funds target rate range from 5.25%-5.50% today to 3.00%-3.25%.

The 19 Federal Open Market Committee (“FOMC”) participants also projected PCE inflation to be 2.4% at year-end 2024 and for 2024 US GDP to grow 2.1%, materially higher than its projection from December 2023.

The Atlanta Fed’s GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2024 was 2.1 percent on March 19, down from 2.3 percent from March 14.

All trends remain in place. There’s no news that will dislodge them in the short term.

The METAR for next week is sunny.



US debt is the underpinning of the US financial system. It allows for a level of return while the money supply is extended by leverage. Lowering the risk level with a government return in the marketplace.

The leveraging allows for a thrust in American power both militarily and economically. Right now is the time to raise the debt. Our economy is building out. We have bigger boots to fill.

The politicians are not fools in this regard. Liars yes they are. One reason to lie is to pick up votes. Another reason is not to encourage other nations to use economic power.

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