Bond Markets doing an equity "Earnings Beat"
Published 2 Nov 2023
The strong US bond rally kicked off immediately after the US Treasury's quarterly refunding announcement, which was then boosted by poor data and Powell's' conference. The attached report looks at the enormous amounts of cash (~$ 1.62trn) that the UST is going to take off domestic investors in the next six months, having already drained $ 1.48trn in the last 6 months. The "beat" of issuance was that supply will be $ 76bn lower than expected - this is literally loose change.
This research shows how shorter maturity bonds will do the heavy lifting followed by notes - for the first time in 23 years there will be an extended period of negative long end supply as issuance of 20 and 30 year bonds will be far outweighed by maturing long end bonds. Expect a reduction in the average life of debt, albeit from high levels, which makes the government's budget more sensitive to changes in interest rates.
The conclusion is that the initial driver for the rally should peter out and that further declines will be led by changing expectations on monetary policy. The report highlights the change in the correlation between the shape of the very front end of the curve and 2s10s and how the deepening inversion of the curve makes long positions more expensive to hold, putting a bigger requirement on a change in Fed policy.