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Barclays: Treasury Yields High Amid Issuance Surge

Barclays predicts elevated Treasury yields amid a surge in issuance, despite potential Fed rate cuts, reshaping global bond dynamics.

By Max Weldon

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4/30, 05:20 EDT
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Key Takeaway

  • Barclays predicts long-term US Treasury yields will stay high due to a surge in issuance, even if the Fed cuts rates.
  • A one percentage-point rise in the deficit-GDP ratio could increase 10-year Treasury yield by 20 basis points.
  • Changing buyer composition and wide US budget deficits pose additional pressures on global bond markets.

Treasury Issuance Pressures Yields

Barclays Plc strategists Jeffrey Meli and Ajay Rajadhyaksha highlight a significant concern for the bond market: an expected glut in Treasury issuance that could keep long-term yields elevated, even in the face of potential Federal Reserve rate cuts. They note, "Long-term yields in the US are likely to remain high, even if the Fed cuts rates," pointing to studies indicating that a one percentage-point increase in the deficit-GDP ratio could push the 10-year Treasury yield up by 20 basis points. This insight comes at a time when the benchmark 10-year Treasury yield has surged to a six-month high, driven by resilient US economic data and trader skepticism regarding the Fed's rate cut trajectory within the year.

Changing Treasury Buyer Landscape

The composition of Treasury buyers is undergoing a significant shift, with foreign central banks' appetite for US debt waning as their reserves have plateaued over the last decade. This change comes alongside the Federal Reserve's intentions to reduce its balance sheet, positioning mutual funds and hedge funds as the primary purchasers of Treasuries. This evolving buyer landscape could further influence Treasury pricing and demand, potentially exacerbating the challenges posed by the anticipated surge in debt issuance.

Global Bond Market Risks

The implications of rising US yields extend beyond domestic markets, posing risks to global bond markets due to their tendency to move in sync with US Treasuries. Barclays warns, "One thing is indisputable: any tremor in US Treasuries is likely to be felt far and wide." This statement underscores the interconnectedness of global financial markets and the significant impact US monetary policy and debt issuance can have on worldwide bond markets. The strategists caution that with an increasing volume of Treasuries on offer, market tremors may become more frequent, highlighting the potential for heightened volatility in global bonds.

Street Views

  • Jeffrey Meli and Ajay Rajadhyaksha, Barclays (Neutral on US Treasuries):

    "Long-term yields in the US are likely to remain high, even if the Fed cuts rates... Studies suggest that a one percentage-point increase in the projected deficit-GDP ratio pushes up the 10-year Treasury yield by 20 basis points." "One thing is indisputable: any tremor in US Treasuries is likely to be felt far and wide. And with the amount of Treasuries increasingly on offer, those tremors are likely to become more frequent."