For many traders and investors, long-term Treasury notes (i.e. U.S. government debt) are the only game in town when it comes to safety. This is true even of some who do not entirely shun the precious metals. This conviction, however, as we have seen, has been shaken by recent dislocations in the bond market.
In fact, there have been several calls over the last few years—most notably by Bill Gross, known within the markets as “The Bond King”—for greater liquidity in the long-term Treasury market. Gross and others have emphasized that a lack of liquidity for Treasurys could cause an acute crisis where bond yields fluctuate too rapidly for market-makers and middlemen to adjust.
When it comes to U.S. government debt, everyone in the financial markets would be caught holding the bag, so to speak, in this kind of situation. It doesn’t help that the country’s policymakers when it comes to both monetary and financial policy have been short on credibility lately.
It looks like the market is currently caught between the rising yields indicative of Fed rate hike expectations and the uneven supply between the short- and long-term Treasury markets. At the moment, there are less long-term Treasury bonds (10 to 30 years) being issued than at any time since 2008. Instead, the Treasury Department has been relying on the aggressive sale of more short-term Treasury bills.
The government recently sold $52 billion of 4-week T-bills, the most ever at a single offering, only a few weeks after its smallest offering of 4-week bills (just $5 billion) in almost 15 years. In the earlier case, the notes had a yield of just 0.01%. The reason for the relatively small auction was the impending debt ceiling, which Congress only narrowly avoided by extending U.S. purchasing power in a last-minute deal. At the time, the Treasury wasn’t certain that it would be able to issue debt normally if the limit was reached.
This trend would seem to be firmly in place for next year. With the government tending to push back to average maturity of its debt issuances (i.e. issuing more long-term Treasury notes) following the financial crisis, it seems that economic recovery should spell a reversal toward the short-term debt. With much more emphasis on getting short-term cash in its coffers, there could be a significant drop in the overall bond supply next year, according to Bloomberg.
So, even with the imminent rate hike from the Federal Reserve lifting bond yields, any rise will be countered by the downward pressure of less net debt being issued. If the government doesn’t need to borrow as much money (through this channel), then yields need not be as attractive. These competing forces may have the effect of stabilizing yields through 2016.
Nonetheless, even with yields so low, Treasurys look very attractive compared to the even-lower yields seen in other developed nations, from Germany to Switzerland to Japan.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.