For the best part of 40 years investors in bonds were buying into the biggest bull market for bonds in modern history. US investors are now experiencing the biggest bear market for bonds in modern history.
The rout could persist, with the likelihood of another increase in the US Federal Reserve Board’s federal funds rate strengthening after Friday’s unexpectedly strong jobs data.US Treasury has already raised a net $US1.8 trillion this calendar year and, with a US budget deficit of close to $US2 trillion expected this financial year , it will continue to hit the market with an unprecedented supply of US government paper.
China, with about $US835 billion of bonds according to the latest available data, has been cutting its holdings of US bonds although it still appears to be an investor in some US debt, but in agency rather than government debt. The heightened tensions between the US and China could be a factor in its decision-making.
That means that most of the buying of the deluge of US Treasuries in prospect will have to be done by US investors, with the narrower base of support suggesting that, regardless of what the Fed does, US interest rates are likely to be higher than they would otherwise have been in order to match the supply with demand.