Analysis-Coming flood of US Treasury issuance unsettles some investors after blazing rally
By Davide Barbuscia
NEW YORK (Reuters) — Cracks are forming in the market’s bullish consensus for bonds, as resurfacing fiscal concerns duel with expectations that cooling inflation will push the Federal Reserve to cut interest rates in coming months.
Bullish investors believe the explosive rally bonds experienced in late 2023 is likely to continue into this year, if the Fed loosens monetary policy as expected. Futures tied to the Fed’s main policy rate on Friday showed investors pricing in more than 150 basis points of cuts — twice the amount policymakers projected last month.
Not so fast, say the bears. While expectations for Fed easing may be driving bond prices now, some believe U.S. Treasury issuance, expected to nearly double to $2 trillion in 2024, could be a counterweight. Yields — which move inversely to bond prices — would have to rise from current levels to entice demand for the flood of new debt, they say. Such concerns helped drive Treasury prices to 16-year lows when they intensified in October.
So far, Treasuries have seen a nascent early year selloff, with yields on the benchmark 10-year Treasury up 16 basis points from their December lows. Net bearish bets on some long-term Treasury maturities in the futures market have surged to their highest level since October, data from the Commodity Futures Trading Commission showed.
«There's really an outrageous amount of U.S. Treasury supply coming from the lack of fiscal discipline in this country, and we don't necessarily see who the buyers are,» said Chris Diaz, portfolio manager and co-head of fixed income at Brown Advisory.
That is “going to be a real headwind for the long-end of the market to continue to rally," he said, as longer-dated maturities are more
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