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How Will The U.S. Finance Its Deficits? – February 19, 2019

How Will The U.S. Finance Its Deficits?

The supply of Treasurys is on track to mushroom in the coming years. Meanwhile, two major sources of demand are receding: the Federal Reserve is shrinking its balance sheet and major foreign official institutions are pulling back. Supply/demand fears have periodically erupted over the past few decades, yet have had little impact on bond yields. The past few months has seen Treasury yields decline even as a trade war erupted between the U.S. and the largest foreign holder of Treasurys, namely China.

– Persistently low U.S. and global bond yields underscore that there is currently no shortage of global capital to fund U.S. borrowing.

– The primary driver of higher Treasury yields that we expect later this year will be firmer global growth and a further creeping up in U.S. core inflation, rather than the widening U.S. budget deficit.