The U.S. Treasury is set to announce further increases in government bond supply in its first quarterly refunding announcement of 2024 on Wednesday, Jan. 31. However, there are concerns about whether there is enough demand for the government to sell the debt at high prices and favorable yields.
Demand for Treasuries decreased at the beginning of the final quarter in 2023 as leading foreign buyers, such as China and Japan, focused on their own debt instead. As a result, yields began to rise and reached a peak of above 5% in mid-October. However, as the Federal Reserve’s rate hike cycle appeared to have peaked and hopes of an economic slowdown diminishing, bond yields dropped sharply and demand for Treasuries started to return.
The shift in Treasury demand is due to improved macro confidence and growing expectations of a Fed rate cut, according to Mark Cabana, rates analyst at Bank of America. The January Treasury refunding announcement is not expected to disrupt this positive trend.
The Treasury refunding process is an important part of government financing. As Treasury bonds reach their maturity date, the government must pay the bondholder the current market price of the bond. Billions of dollars of government debt expire in this way every year, requiring the government to issue more debt to cover it.
Cabana’s team at Bank of America predicts that the Treasury will increase the sizes of its auctions, as it did in November. This includes increases in the two- and five-year Treasuries, the three-year Treasury, and the seven-year Treasury. Auction sizes for the 10-year note and the 30-year bond will also be increased. Bond prices move inversely to yields, so as Treasury yields have slightly risen at the beginning of the year, prices have decreased.
Despite the increased supply, demand has so far kept pace, according to Cabana. There has been an improvement in Treasury demand from a range of investors, including banks, pensions, and foreign investors. However, concerns about Treasury supply are likely to arise again over time, especially considering the large and growing U.S. deficits.
Overall, it is expected that reduced macro uncertainty and anticipated Fed rate cuts will support Treasury demand in the near term. However, the issue of Treasury supply will continue to be a significant factor in the Treasury market.