Jack Janasiewicz offers his tactical take on some of investors’ biggest concerns about the US Treasury market.
It’s been tough sledding for the markets the past few months. And seeing that the Treasury market has taken the equity market hostage, it’s important to understand the Treasury market.
One of the key worries that we hear from investors is, “Who is going to buy all of this supply that is required to finance the yawning fiscal deficit?”
The other is, “So-and-so is selling their Treasury holdings and that is pressuring yields higher.”
There are a few narratives out there that we think are a bit misguided.
Is China really selling their US Treasury holdings? A closer look at the data indicates that it’s pretty easy to draw the wrong conclusion from a cursory overview.
The methodology for assigning ownership of Treasurys is based on the custodian’s location. In China’s case, they custody many of their holdings in Belgium – so the forensics behind tracking international holdings can be tricky.
Regarding Treasury demand, as volatility spikes, uncertainty increases – and price-sensitive buyers move to the sidelines. A buyers’ strike.
However, as yields move higher, those price-sensitive players find value in higher yields and lower prices, and will step back in for yields at 5%.
Where are yields headed? While the October Federal Reserve meeting was largely uneventful, Chair Powell made it clear that strong economic growth doesn’t necessarily equate to inflation, and doesn’t inherently mean more rate hikes.
So hikes are done for 2023 – and the bar for further hikes has been raised.
And one more thing that’s been underappreciated by many: productivity might actually be on the rise – and rising productivity is the key to robust but disinflationary real growth.
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