Why Questions Are Concerning Who Will Buy More Than $31 Trillion Of US Debt – And At What Price

For the first time ever, the national debt of the United States exceeded above 31 trillion dollars This month, as the Federal Reserve backs away from buying government bonds and foreign investors’ interest in it wanes.

With the biggest players out of the picture, Treasurys is now looking for another reliable group of buyers. There’s no doubt that the stock will eventually end up in someone’s hands, according to strategist Matthew Hornbach at Morgan Stanley. The bigger question, he says, is the price at which these securities will then be bought and sold through marginal players.

Source: Morgan Stanley Research, Federal Reserve, Bloomberg

The Lack of major buyers For Treasurys it is just another source of concern on the list of concerns plaguing the US government bond market. In fact, the market, the world’s deepest and most liquid fixed income market, is facing poor liquidity – a number of traders, academics and bond market experts say create a crisis. In addition, the treasury market Its counterpart in the United Kingdom The recent broad sell-off has led to the BoE’s intervention and raised fears of a spillover into the US markets.

Read: UK crisis causes unwanted US debt Opinion: The stock market is in trouble. That’s because the bond market is “very close to crashing.”

A variety of economic actors buy US Treasuries. Whether the buyers are commercial banks, asset managers or American households, someone will buy Treasury bonds issued by the government, Hornbach wrote in a note on Tuesday. The most important question for investors in general is “Not who will buy securities, but at what price?”

Falling bond prices translate to higher yields on Treasuries, and right now, those returns are either higher or not far from 4% – levels not seen in over a decade. In theory, further declines in bond prices would push yields higher, reducing the attractiveness of risky assets such as stocks, at a time when some market participants have floated the idea of approximately 5% The target for the federal funds rate is on the radar. Increased expectations of the Fed’s 5% target rate are likely to push Treasury yields toward 5%.

Hornbach said that over the past 30 years or more, the single most important factor determining the level of Treasury yields – moving in the opposite direction to prices – has been the Federal Reserve since its interest rate policy and future guidance drive expectations.

Now that the central bank has raised interest rates at the fastest pace in decades to contain rampant inflation, it is also shrinking its balance sheet after ending bond purchases earlier this year — all with the intent of tightening financial conditions.

We see: The stock market wild card: What investors need to know as the Fed shrinks the balance sheet faster

Meanwhile, foreign investors — led by those in Japan and China, who paved the way for the rest of the world to achieve significant positions in Treasurys from 2001 through 2010 — have been steadily reducing their holdings of US government bonds since 2014, according to a Morgan Stanley strategist.

Data provided by Barclays Park,
Tuesday paints an overall negative picture for US fixed income markets. In short, it showed that bond funds saw a rise in outflows during the week that ended October 5, just as foreign custody holdings in the Federal Treasury declined.

On Tuesday, traders returned from the Columbus Day holiday, which closed the US bond market in the previous session. Two- TMUBMUSD02Y,
and US 10-Year Bond Yield TMUBMUSD10Y,
It rose to a two-week high on Tuesday, while the 30-year TMUBMUSD30Y,
It reached its highest level since 2014. The Dow Industrial Average ended 0.1% higher, while the S&P 500 SPX,
The Nasdaq Composite fell.

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