RESEARCH CONTENT:
HISTORICAL OBSERVATIONS
A catalogue of the rise in outstanding US government debt (UST)
The Treasury department carefully manages sudden UST debt increases through predictable actions
The increased size of outstanding UST makes the debt servicing cost more sensitive to interest rates
UST debt servicing at current interest rates is in line with historic costs, but there are other serious consequences from the enlarged debt load
UST demand trends have fluctuated post GFC
The Fed’s QE/QT programmes have significantly impacted (in a negative way for yields) the balance of UST supply and Domestic investor demand
CURRENT ENVIRONMENT
The US government is running a fiscal deficit (leading to increased net UST supply) whilst the Fed is undertaking QT.
Domestic investors are having to purchase an increasing large amount of UST
The current environment is similar to the supply/demand dynamics of 2018, but on a larger scale (chart above)
MARKET RISKS
Investors are receiving ever increasing real yields to absorb the higher supply of USTs
Given poor monetary growth, there is a risk of “crowding out” of private sector assets