Treasury Securities Insights

Book of the Week: The Treasury Bond Basis by Galen Burghardt & Terry Belton While this book delves deeply into a highly specific segment of the fixed income markets—treasury bond futures—its insights go far beyond that niche. Chapter 1, in particular, is a must-read for anyone working in or aspiring to understand the broader fixed income markets. It offers an accessible and insightful description of bonds, touching on crucial topics such as valuation, the assumptions behind bond redemption yield, interest rate risk, and accrued interest. First published in 1994, The Treasury Bond Basis by Galen Burghardt remains a timeless resource. Despite the evolution of financial markets, the principles laid out in this book continue to be relevant. It is both a practical guide for practitioners and an excellent educational tool for those seeking to understand complex concepts like basis trading and cash-futures arbitrage. Why you should read it: - Chapter 1 alone provides a foundational understanding of bonds, making it beneficial even for those who do not trade futures. - The book covers critical topics like the basis arbitrage between the Treasury Long Bond and the T-Bond futures contract, helping readers appreciate the dynamics of this market. - It combines theoretical insights with practical applications, offering clarity on the futures delivery process, basis risk, and valuation. Whether you are a seasoned professional or new to fixed income, the book’s structured approach to understanding the treasury bond market makes it an excellent learning tool. If you are specifically interested in basis arbitrage or understanding the mechanics of treasury bond futures, this book is a treasure trove of valuable insights. It is rare to find a resource that balances technical depth with accessibility as effectively as this one. Book Reference: https://tidd.ly/3Z33JAl

The September Bond auction results are in, and they reveal significant insights into current investor sentiment in Zambian Government Securities. Strong Oversubscription: Bids totaled K4,440.92 million against a K1,800 million budget—a significant increase from last month's K2,057.44 million. All tenors were oversubscribed, with the 5-year tenor leading demand at K1,156.25 million (vs. K370 million budget). Increased Allocation: Government allocated K4,291.27 million, substantially above budget and higher than last month's K2,039.32 million allocation, signaling strong sustained investor appetite. Interest Rate Movements: Rates remained largely stable, with only minor adjustments from last auction's results —the 3-year tenor increased from 15.50% to 16.25%, while the 7-year tenor edged up marginally from 18.49% to 18.50%. Market Outlook: With inflation slowing to 12.3% in September, we anticipate stable Government Bond interest rates unless investor sentiment shifts significantly. The healthy demand trend should continue as both retail and institutional investors enter capital markets, particularly given limited low-risk alternatives. Budget Context: Finance Minister Dr. Situmbeko Musokotwane's K253.1 Billion 2026 Budget presentation on Friday 26th September highlighted that 81.6% (K206.5 Billion) will be financed through domestic revenue, with domestic borrowing accounting for K34.5 Billion. This financing structure demonstrates the Government's commitment to prudent borrowing practices, emphasizing domestic resource mobilization over external debt. By prioritizing domestic revenue generation and maintaining a balanced approach to borrowing, the administration signals fiscal discipline while supporting local capital market development. It's worth noting that domestic debt servicing in the 2026 Budget has increased due to upcoming maturities for Treasury bills and Government Bonds issued between 2015 and 2021, reflecting the natural debt cycle and the Government's commitment to honoring its obligations to domestic investors. Tax Impact Assessment: Despite concerns about the Withholding Tax increase on coupons from 15% to 20%, investor appetite remains strong. The fixed-income nature of Government Securities continues to attract risk-averse investors with limited alternative options. Investment Strategy: Success in this environment requires strategic coupon reinvestment and diversification into more tax-efficient asset classes. Please consult a licensed financial advisor before making investment decisions to ensure your portfolio aligns with your risk appetite and investment timeline. #ZambianBonds #GovernmentSecurities #ZambianCapitalMarkets

China’s Share of U.S. Treasuries China’s share of outstanding U.S. Treasury securities has declined to approximately 7.3%, down from a peak of 29% in 2011. Total holdings are currently around $683 billion. This decline has occurred gradually over more than a decade and reflects a structural reallocation of China’s foreign exchange reserves. Several factors are relevant: China’s current account surplus has narrowed relative to the 2005–2013 period, reducing the pace of reserve accumulation. The People’s Bank of China has diversified reserves across currencies and gold. Geopolitical risk has likely increased the perceived concentration risk of holding large amounts of U.S. sovereign debt. Importantly, while China’s relative share has declined significantly, the overall U.S. Treasury market has expanded materially. Therefore, the reduction in percentage share does not imply equivalent pressure on Treasury yields, as domestic and other foreign buyers have absorbed issuance. The structural question is not whether China is reducing exposure. That is observable. The relevant issue is whether marginal demand for Treasuries remains sufficient to fund persistent U.S. fiscal deficits without upward pressure on long-term rates. Source: Econovisuals

"Repo on government bonds: from yield enhancement tool to systemic vulnerability — ALM implications" (by Alessio Gioia) The new Financial Stability Board report on “Vulnerabilities in Government Bond-backed Repo Markets” provides highly relevant insights for professionals working in ALM, Treasury, and Risk Management. In recent years, many banks have relied extensively on yield enhancement strategies based on: ➡️ investments in government bonds ➡️ funded through repo transactions ➡️ with significant contributions to Net Interest Income While efficient under normal market conditions, this setup exposes banks to structural vulnerabilities that the FSB report clearly highlights: 🔹 dependence on very short-term funding 🔹 implicit leverage on securities portfolios 🔹 amplification of liquidity and rollover risks 🔹 strong interconnectedness across institutions and markets 📌 From an ALM perspective, the key takeaway is that government bond portfolios funded via repo can no longer be treated merely as tactical carry trades. They must be fully embedded in the structural management of: ✔️ liquidity ✔️ funding stability ✔️ stress resilience ✔️ sustainability of LCR and NSFR buffers In particular, banks should increasingly: 👉 assess rollover risk in repo strategies 👉 account for dynamic haircuts and collateral stress 👉 integrate repo-funded portfolios into ALM stress testing 👉 avoid excessive funding concentration 👉 align carry strategies with long-term balance sheet resilience 💡 In an environment of heightened geopolitical uncertainty, rate volatility, and monetary policy normalization, the trade-off between short-term profitability and structural balance sheet resilience is once again central to ALM governance. 📎 I’m attaching the full FSB report — well worth a careful read.

📉 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