Where Have All the UST Buyers Gone?
With US debt to GDP above 120%, deficits running 7% of GDP, US NIIP at -70%, the US government sanctioning “enemies” out of their desire to buy and add to their UST holdings, and the Fed on the sidelines with QT, the US government needs more private demand for Treasuries at higher yields to buy the burgeoning UST supply that shows no signs of slowing down.
Washington DC is completely dysfunctional, there is no appetite to cut spending or to raise taxes, so borrowing more and more from the future is the only way forward. However, DC is only doing this because the Fed enables this behavior by continuously neutering bond vigilantes whenever they peek their heads up and try to enact some pricing discipline on policymakers.
5 times in the last 5 years has seen the Fed (and Treasury) panic to provide US$ liquidity when bond volatility got too high (happening at lower levels on MOVE index and lower DXY) and yields moved too rapidly higher (Sept 2019 repo crisis, March 2020, October 2023 gilt crisis, March 2023 SVB and October 2023 bond selloff), preventing the vigilantes from exacting their pound of flesh and forcing any real change in DC. But this also has meant inflation has remained sticky as market participants have figured out the joke and know the Fed “put” gets struck quicker and quicker each time.
The Fed acts out of fear of the bond market and they are right to be fearful. We are running out of options here if the Fed is serious about getting inflation under control. If they are not, well, they are going to wind up orchestrating a massive devaluation of the US$ against hard assets. Bad choices are coming down the pike either way. Volatility is super compressed across all assets. Time to hedge up.
For now, while there is no violence/rioting/looting over the rise in inflation, the Fed/Admin are comfortable with this plan. But later this year, into the election, should inflation reacceleration start to move toward a darker conclusion, I don’t think they will be happy with the choice they made.
