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.