The US Treasury market is currently not particularly bothered by the extra issuance supply resulting from the higher deficit.
There are three reasons for this. Firstly, we’re on the eve of a Fed rate-cutting process and this is dominating market direction with markets expecting 200bp+ of Fed rate cuts over the next 18 months.
Second, the Treasury has managed to curb the effect of the extra issuance by morphing the more significant increases towards shorter maturities.
Third, there is a risk-on market theme out there with equities at record highs, implying the market believes there is little to worry about.
Going forward, a lack of market concern about the size of the deficit can easily pivot to it being top of the list of worries. The transmission mechanism here is a few poor bond auctions that become a trend, requiring the build of a material new issue concession that gets built into structurally higher absolute yields….
