Americans ♥️ Treasuries

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

‘Treasury-supply-is-lifting-yields’ is the Rasputin of bond market narratives, simply refusing to die whatever the actual evidence indicates.

To be fair, it’s understandable that the US running a near $2tn annual budget deficit at a time when the economy is strong would freak some people out. Speaking to bond folks it seems plausible that the narrative of supply is leading to at least some of the recent yield uplift.

But to paraphrase Jurassic Park’s Dr Ian Malcolm, markets find a way.

Now, the big caveat is that the household component of Treasury holding data oddly includes hedge funds, and the massive ramp-up in household Treasury purchases therefore probably also reflects the increase in basis trades. That’s . . . not great, even if the leverage is lower these days.

But the majority of the almost $700bn worth of Treasuries households bought in the first half of 2023 is probably just Americans taking advantage of much higher yields on offer. We’re now on pace for a $1.3tn Treasury buying spree by households.

American households (plus hedge funds) on the whole now own 9 per cent of the US Treasury market, up from just 2 per cent at the start of 2022, according to Goldman Sachs.

However, this has implications for equities. As Goldman’s David Kostin writes:

Recent volatility in the Treasury market has driven increased investor concern over the fiscal position of the United States and the supply/demand mismatch for Treasury securities. Our rates strategists believe increased Treasury supply will not catalyze further upside infields. However, the attractive level of yields will continue to entice households to purchase yield-bearing assets rather than equities.

US households own 39 per cent of all US equities, dwarfing all other holders. And their current 42 per cent allocation to equities is now in the 96th percentile since 1952, according to Goldman.

Foreign investors have been ramping up their purchases lately, but Kostin reckons that this is going to be swamped by Americans paring back their own US equity exposure.

Coupled with pension plans also taking advantage of higher yields, this will leave US companies themselves as the only real significant pillar of US equity demand.

It’s interesting that Goldman thinks that buybacks will rebound back above $500bn annually in 2023-2024. That’s way down from the $1tn plus annual rate we saw in the zirp era, but still feels punchy given the massive increase in borrowing costs.

Of course, demand/supply dynamics have mattered just as little for US equities as they have for US Treasuries (corporate buybacks was the main demand in the 2010s as well, and that didn’t matter for one of the biggest bull runs in history).

But eyeballing this flow data we can see why people keep punting money on TLT and TMF.