Factors Impacting US Treasury Performance

A very junior trader asked “what should I be paying attention to most right now?” My response was simple; “master the plumbing because it’s the key to everything. I tried explaining that “price action is like the surface of the water, but funding is the tide, so if you pay attention to funding relationships like SOFR vs EFFR/IORB or track the TGA/QT backdrop, you’ll understand why risk often turns before the headlines do.” When cash gets scarce, funding costs jump, balance sheets tighten, and leveraged risk gets cut. That pressure often hits the crowded/high-beta/AI complex first. Relief comes when the Treasury spends cash back into the system and the Fed’s balance-sheet runoff (QT) is less of a headwind. 1. SOFR > IORB = reserves are tight; primes are tightening; levered longs may come down. 2.  TGA bleeds down and QT slows, reserves rise, repo compresses, beta can catch a bid.   “PLUMBERS”  DASHBOARD ·        SOFR vs EFFR and vs IORB (direction of stress) ·        TGA path (is Treasury adding or returning liquidity?) ·        Fed balance sheet/H.4.1 (reserve trend) ·        Month/quarter-end kinks (dealer balance-sheet windows) ·        Repo color (haircuts, specials, fails, term) ·        Prime-broker updates (client leverage/margin/utilization) ·        Systematic flows (CTA/vol-control thresholds) ·        Equity factor tape (high beta vs low vol; crowded baskets)

Who’s really moving the U.S. bond market? Look abroad. Something strange is happening in the Treasury curve. Markets expect 3–4 Fed cuts this year. Growth is softening. Yet long-end yields are rising—steepening the curve instead of the typical bull-flattening we’d expect. It’s not a textbook macro move. So what’s going on? There are two likely culprits: A basis trade unwind (technical, opaque, and hard to confirm). A shift in foreign ownership patterns—particularly among big holders like China and Japan. Here’s the data: February numbers showed no major foreign selling. In fact, China, Japan, and the UK added to Treasury holdings. But with trade tensions flaring and tariffs rising, the risk of a future sell-off is growing. April’s data could be a turning point. Why does this matter? Because the U.S. depends on foreign buyers to fund its fiscal position. And if geopolitical tensions lead to a buyers’ strike—or even mild selling—yields will reflect it faster than economic models can explain. My take? Don’t assume yield curve moves are purely about inflation and growth. Watch capital flow trends, not just economic releases. Monitor foreign reserves and central bank behavior—especially from Asia. What I’m watching now: April foreign holdings report from the U.S. Treasury Capital controls or FX policy shifts from China Reactions from institutional buyers if yield volatility persists When the bond market doesn’t behave, always ask: who’s really behind the move? For more macro thinking from the CIO Office: https://lnkd.in/eE72jwdj #CIOperspective Tathagata Bhar Anuragh Balajee Dhrumil Talati

Shifting hands in US Treasuries Foreign holdings of US Treasuries tell a fascinating story about global capital flows and geopolitical realignments. • China has been steadily reducing its holdings, now down to $730B, the lowest level in over a decade • Japan remains the largest holder at $1.15T, but its position has also moderated from prior peaks • The real standout? The UK, which has sharply increased its holdings, now at nearly $900B This shift reflects more than just portfolio management: - China diversifying away from dollar assets amid rising US-China tensions - Japan balancing domestic pressures with global positioning - The UK acting as a global financial hub, where many foreign investors—possibly even via intermediaries—channel US Treasury exposure With US debt levels at record highs and global demand reshuffling, the Treasury market remains the backbone of the financial system—but who funds it is changing. The question is: how sustainable is this shift, and what might it mean for yields, the dollar, and financial stability in the years ahead?

Persistently loose US fiscal policy is the most alarming feature in the US economic landscape and the most consequential for the yield outlook over the medium-term, in my view. The cost of loose fiscal policy is no longer masked by very low borrowing costs, and thanks to the Fed’s efforts, inflation will no longer be reducing the real value of the government debt stock.   And yet, with the US presidential elections getting closer, both parties seem determined to still…spend lots of money, with no intention to try and curtail the deficit. In all likelihood, over the next few years the debt to GDP ratio will climb further, and rising debt servicing costs will make fiscal consolidation even more challenging. Eventually, Congress will have to compromise on some mix of entitlement  reform and tax hikes.   For now though, the prospect of persistently loose fiscal policy strengthens my conviction that the coming Federal Reserve easing cycle will be short and shallow—I expect the fed funds rate will bottom at around 4% which would in turn translate into 10-year US Treasury yields north of 5% in the medium term.   #fixedincome #investmentstrategy #deficit #debt #fiscalpolicy #inflation #interestrates

I remain quite concerned with recent movements in #asset prices and am not mollified by the arguments that short-term trade position unwinding is the major motivator for what we see. Trade position unwinding of this type seems to be a relevant factor but we have seen such trade unwinding in other events and asset prices, in general, have not behaved like that. In light of recent market developments following President Trump's "Liberation Day" tariff decisions, I continue to entertain the view that financial markets are increasingly showing signs of more structural and lasting shifts. Notably, US Treasury #bonds, traditionally viewed as the ultimate #safe-haven asset, have been displaying behavior reminiscent of riskier #securities. Unlike previous episodes of global uncertainty—where Treasuries consistently rallied—recent days have seen simultaneous declines in Treasuries, equities, and other traditionally risky assets. This divergence from historical norms suggests some reassessment by global investors of the underlying safety and reliability of #US government #debt. If that continues, the implications of these movements extend well beyond short-term #volatility. Persistent fiscal deficits and unpredictable tariff policies are exacerbating doubts about the US's commitment to disciplined economic management, potentially undermining long-term investor confidence. Of that, I have no doubt. This erosion is reflected clearly in #Treasury #yields, particularly at longer maturities, and the noticeable retreat of foreign investors from US assets. Given the pivotal role US Treasuries play as global financial benchmarks and collateral, these structural shifts could indicate a more lasting recalibration of market sentiment and risk perceptions surrounding US debt and assets more broadly. How structural and deep this recalibration is I do not know. My bottom line for now: something more structural is happening in the market but I do not know the extent of it. As a wise man once said: when facts change, I change my point of view. So, nothing is written in stone.

📉 𝗪𝗵𝘆 𝗥𝗶𝘀𝗶𝗻𝗴 𝗚𝗼𝘃𝗲𝗿𝗻𝗺𝗲𝗻𝘁 𝗗𝗲𝗯𝘁 𝗛𝗮𝘀 𝗜𝗻𝘃𝗲𝘀𝘁𝗼𝗿𝘀 𝗪𝗮𝘁𝗰𝗵𝗶𝗻𝗴 𝗟𝗼𝗻𝗴-𝗧𝗲𝗿𝗺 𝗥𝗮𝘁𝗲𝘀 The U.S. federal debt has recently surpassed $35 trillion, marking a significant milestone that has far-reaching implications for investors. As of July, this debt equates to over $100,000 per citizen, reflecting an increasing federal debt-to-GDP ratio now at 122%. Key Points to Consider: 1. 𝗗𝗲𝗯𝘁 𝗚𝗿𝗼𝘄𝘁𝗵 𝘃𝘀. 𝗚𝗗𝗣 𝗚𝗿𝗼𝘄𝘁𝗵: The federal debt is growing at around 7.7% annually, while nominal GDP grows at 5.4%. This disparity suggests that the debt-to-GDP ratio will continue to rise, potentially exceeding 150% by 2030. 2. 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗣𝗮𝘆𝗺𝗲𝗻𝘁𝘀 𝗦𝘂𝗿𝗴𝗲: Quarterly interest payments on federal debt have now surpassed $1 trillion, up from 1.22% of GDP in 2015 to 2.41% at the end of 2023. This figure is projected to reach 3.6% by 2033, comparable to current defense spending. 3. 𝗜𝗺𝗽𝗮𝗰𝘁 𝗼𝗻 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁 𝗥𝗮𝘁𝗲𝘀: With increased debt issuance and stagnant revenue, interest rates are expected to rise over the long term. The Federal Reserve's quantitative tightening and increased debt supply will likely exert upward pressure on rates. 4. 𝗗𝗲𝗰𝗹𝗶𝗻𝗶𝗻𝗴 𝗙𝗼𝗿𝗲𝗶𝗴𝗻 𝗗𝗲𝗺𝗮𝗻𝗱: Foreign investment in U.S. Treasuries has decreased from 58% in 2008 to 33% as of mid-2024, influenced by global yield differentials and deglobalization. 5. 𝗙𝘂𝘁𝘂𝗿𝗲 𝗣𝗿𝗼𝗷𝗲𝗰𝘁𝗶𝗼𝗻𝘀: The CBO estimates the federal debt could reach $52 trillion by 2033. While immediate rate reductions may be on the horizon, investors should be prepared for longer-term pressures on rates due to rising debt levels. As we navigate through current monetary policies and economic conditions, understanding these long-term debt dynamics is crucial. It’s a reminder that while short-term factors may influence rates now, underlying debt trends will play a significant role in shaping the future landscape.

The US fiscal situation is back in focus following the Moody’s downgrade and steady rise in longer-term Treasury yields. Our latest POTUS 47 report from Thomas Wacker, Kurt Reiman, and Leslie Falconio breaks down the impact going forward. The key summary points: -US budget #deficits should remain elevated for the foreseeable, as tariffs are unlikely to be sufficiently long-term funding source for tax cuts. -Bond yields have not yet reached levels that would force legislators to confront unsustainable debt growth, but that point is drawing closer, as indicated by the recent rise in term premium for longer-dated Treasuries. -We expect that the US government may pursue both fiscal consolidation and financial repression to contain #yields and keep the high debt burden manageable. -Powerful measures of financial repression in the US would likely have global repercussions for asset prices, with the impact depending on the details and prevailing economic and financial market conditions. -Distortions from financial repression may create various tactical trading opportunities, but global diversification remains the most effective way to preserve wealth. Read more below

🇺🇸 Moody’s Downgrades U.S. Credit Rating: What It Means for Markets & the Economy The U.S. just lost its last AAA credit rating. Moody’s downgraded the nation to Aa1, citing rising debt, deficits, and political gridlock. Here’s what you need to know: Why This Matters: ✅ First Time in History: The U.S. no longer holds a triple-A rating (AAA) from any of the big three agencies (S&P 2011, Fitch 2023, Moody’s now). ✅ Debt Crisis Warning: Moody’s projects U.S. deficits will hit 9% of GDP by 2035 (vs. 6.4% today) due to: - Soaring interest payments - Entitlement spending (Social Security, Medicare) - Weak revenue growth ✅ Market Reaction: 10-year Treasury yields rose to 4.49% — signaling higher borrowing costs ahead. The Root of the Problem: 1️⃣ Unsustainable Fiscal Path - U.S. debt-to-GDP is ~120% and rising - Trump’s proposed tax cuts could add $4.2 Trillion+ to deficits - No credible plan to control spending 2️⃣ Higher for Longer Rates - Fed policy + sovereign rating downgrade = more expensive debt rollovers - Interest costs alone could hit $1.6 Trillion /year by 2033 Market & Economic Implications: 🔸 Treasuries Under Pressure: If demand weakens, US treasury yields could spike further. 🔸 Corporate & Mortgage Rates: Higher treasury benchmark yields drive corporate and mortgage borrowing costs higher. 🚨 The Bigger Risk: This isn’t just about Trump or Biden—it’s a structural crisis decades in the making. Without major reforms, the U.S. could face a debt spiral that becomes difficult to control (higher rates → bigger deficits → more downgrades). Krishank Parekh | LinkedIn

Higher Yields on Ten-Year Treasury Bonds. No one reading my posts should be surprised at the recent jump in yield on the 10-year Treasury bond. The “Investment Review of 2023 and Strategy for 2024,” released on December 17, 2023, says, “I think the one-year Treasury note (yielding 4.93%) dominates the 10-year (yielding 3.91%). And that is for two reasons: uncertain inflation and uncertain real yields…Both of those underlying factors are likely to turn out higher than expected, which would produce losses.” And I then added, “America’s federal deficit remains at 6% of GDP, an unprecedented number with full employment in peacetime. Congress seems uninterested in reining in the budget and that could easily drive-up real yields demanded by saver/investors.” Last week the yield on the 10-year bond hit 4.41%, a significant jump of ½ percentage point compared with December 2023, producing a capital loss of about 4%. On the other hand, the yield on the one-year Treasury rose only slightly, to 5.07%, and the price barely budged on this short-duration security. So, where do we go from here? It all comes down to supply and demand, of course. More bond supply will require higher rates to lure investors and greater demand would reduce the required yield. One source of supply that threatens the Treasury market is the federal deficit. The unprecedented deficit props up the expected supply of bonds, preventing rates from declining too much. Two months ago, Treasury Secretary Janet Yellen said, “I do believe we need to reduce deficits and to stay on a fiscally sustainable path.” And even Fed Chair Jerome Powell, who had been reluctant to weigh in on the deficit, said it was “probably time or past time” to deal with the “unsustainable” level of borrowing. Neither Yellen nor Powell said that the deficit provoked high interest rates. But both know it. Good Luck, Bill Silber, April 7, 2024, 4:10pm. #investing #interestrates #deficits        

📉 Foreign Ownership of U.S. Treasuries Is in Long-Term Decline Did you know that foreign investors currently hold ~33% of U.S. Treasury securities? That might sound significant — and it is — but its not just the level that matters, its the direction of travel: ➡️ A decade ago, that number was closer to 50%. ➡️ The share has been in a steady, structural decline since 2014. Why does this matter? 🌍 Global central banks are no longer the price-insensitive buyers they once were. 🇨🇳 Countries like China and Japan have reduced their exposure, citing diversification, rising hedging costs, and geopolitical risk. 📈 Meanwhile, domestic buyers — U.S. households, institutions, and the Fed — have picked up the slack. But with deficits rising and issuance ballooning, can domestic demand alone support the market? This trend has major implications: 1. Interest rate volatility may increase as the marginal buyer changes. 2. The bond market becomes more sensitive to shifts in domestic liquidity and risk sentiment. 3. And over time, it challenges the assumption that the world will always have an insatiable appetite for U.S. debt. Something to keep a close eye on. 📊 The structure of Treasury demand is evolving — and with it, the implications for interest rates, fiscal policy, and markets. #Macroeconomics #USTreasuries #Geopolitics #FiscalPolicy #Markets #Investing #Dollar #BondMarket #GlobalEconomy #USDebt