May 27, 2020
Peter Wilson, Global Fixed Income Strategist
Treasury Borrowing Begins—and the Yield Curve Reacts
Treasury yield curve starts to anticipate increased supply
On May 4, the U.S. Treasury Department announced that it would borrow almost $3 trillion in the second quarter of 2020 so it can fund the government’s massive fiscal response to the coronavirus crisis. The following week, we saw how this may be reflected in the market, with Treasury issuance totaling $96 billion in 3-year, 10-year, and 30-year securities—$8 billion higher than the last round of auctions at these maturities.
The chart reflects how yields responded to this supply increase. The 2-year Treasury yield continued to decline, but the 10-year yield rose, taking the spread between 2- and 10-year Treasury yields above 0.5%. Concern that the market will struggle to absorb increasingly large Treasury supply appears behind this yield increase, along with worries that increasing debt could fuel higher inflation in coming years.
What it May Mean for Investors
- We expect longer-term Treasury yields to rise, but only modestly. The Federal Reserve (Fed) is purchasing just over $9 billion per business day, but this can be increased as needed to help prevent short-term yield hikes. We see the 10-year Treasury yield in a range of 0.75-1.25% at year-end 2020.
- In the near and intermediate term, we expect the pandemic’s impact to be disinflationary, if not deflationary. The Fed’s favored medium-term indicator of inflation expectations stands at 1.38%, close to all-time lows.
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