U.S. Treasury Bonds Are Losing Their Appeal
U.S. Treasury bonds are a type of debt issued by the U.S. government to finance its spending. They are considered to be safe and reliable investments and are widely used by investors, banks, and foreign governments. However, in recent years, U.S. Treasury bonds have faced a decline in demand and a rise in yields, which means they are becoming less attractive and more expensive for the government and the bondholders.
The U.S. government has been borrowing more than expected to cover its budget deficits. This means the government has to issue more Treasury bonds to raise money, which increases the supply of bonds in the market.
At the same time, the demand for Treasury bonds has been weakening, both from domestic and foreign buyers. The Federal Reserve, which was the largest buyer of Treasury bonds during the pandemic, has been selling off its own holdings, as part of its plan to reduce its balance sheet and normalize its monetary policy. This means the Fed is adding more bonds to the market, rather than buying them.
Other major buyers of Treasury bonds, such as China and Japan, have also been reducing their purchases, as they have been facing their own economic and geopolitical challenges. China and Japan have been selling their Treasury bonds to support their weakening currencies, which have been under pressure from the strengthening U.S. dollar. A decade ago, China and Japan held more than 22% of U.S. government bonds; today it’s 7%.
U.S. banks, which were another big buyer of Treasury bonds during the pandemic, have also been backing away. Banks had stored a surge of new deposits in government bonds because they had no other place to put them, as demand for loans was low. Now that deposit excess is easing and businesses are borrowing again, banks have less need for Treasury bonds. Plus, many banks are sitting on huge paper losses on Treasury bonds, as their prices have fallen due to the rise in yields. Bank of America, which has $132 billion of unrealized losses, has already sold half its Treasury bonds last year.
The Consequences Of Rising Yields
The result of the mismatch between supply and demand is that Treasury bond prices have fallen and yields have risen. The yield on the 30-year Treasury bond, which is a measure of long-term inflation expectations, has risen from 2.2% to 5.2% over the same period. These are the highest yields since 2007, before the global financial crisis.
The rise in yields has also made Treasury bond auctions more difficult and costly for the government. Treasury bond auctions are the process by which the government sells new bonds to the public. The higher the yield, the lower the price that the government can get for its bonds, and the more interest it has to pay to the bondholders. In recent months, Treasury bond auctions have seen weak demand and low bid-to-cover ratios, which indicate how many bids the government receives for each bond it sells. For example, last October, the government sold $27 billion of 20-year Treasury bonds at a yield of 5.1%, with a bid-to-cover ratio of 2.1, the lowest since the bond was reintroduced in May 2020.
The rise in yields has also hurt bond portfolios, which lose value when bond prices fall. The longest-term Treasury bonds are in a bear market worse than the dot-com crash and almost as bad as 2008.
What This Means For You
The decline in demand and the rise in yields for Treasury bonds have serious implications for taxpayers, investors, and financial markets. For taxpayers, the rise in yields means the government has to pay more interest on its debt, which adds to its budget deficits and debt burden. Already, 2.5% of the U.S.’s economic output is going to service its existing debts, a number that some analysts expect to reach 4% by 2030. This means the government has less money to spend on other programs, such as the CHIPS Act and student-loan forgiveness, or has to borrow more to fund them, which further increases the supply of Treasury bonds.
For investors, the rise in yields means lower returns and higher risks for bond investments. Investors who own Treasury bonds or bond funds are seeing their portfolio values shrink, as bond prices fall. Investors who want to buy Treasury bonds or bond funds are facing higher costs, as bond yields rise. Investors who are looking for alternatives to Treasury bonds or bond funds are facing a trade-off between higher returns and higher risks, as they have to venture into riskier assets, such as stocks, corporate bonds, or cryptocurrencies.
For financial markets, the rise in yields means more volatility and uncertainty, as Treasury bonds are the foundation of the global financial system. Treasury bonds are used as a benchmark for interest rates, a hedge for risk, a source of liquidity, and a reserve asset. When Treasury bonds become less stable and less attractive, it affects the pricing, the risk management, the trading, and the holding of other financial assets. For example, hedge funds that got caught on the wrong (and heavily leveraged) side of a violent Treasury swing earlier in March sold whatever else they could, contributing to the rout in stocks. Safe havens only work if they’re safe.
U.S. Treasury bonds are losing their appeal, as they face a decline in demand and a rise in yields. This is the result of the imbalance between supply and demand, caused by the government’s borrowing spree, the Fed’s balance sheet reduction, and the pullback of foreign and domestic buyers. This has serious consequences for taxpayers, investors, and financial markets, as it increases the cost and the risk of holding and issuing Treasury bonds, and reduces their value and their role as a safe and reliable asset. U.S. Treasury bonds are no longer the gold standard of the financial world. They are more like fool’s gold.
Ready to fight for a better America? Join us below.
Join us and we will show you how to stop it.
One man or woman cannot drain the DC Swamp, but together with you, we can. Join us.
Remember your information will be secured and will not be shared with anyone. We are launching our platform soon, please preregister and get updates and reserve your place when we launch. Due to the huge interest, we can only take limited number of new members this year.