Mr. Market is a Treasuries junkie.
And we are about see the price it has to pay for a detox.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
In the article below, I explained that the supply of Treasuries is very important bull market fuel because it pumps no/low risk assets into investor portfolios which encourages them to increase their allocation to risk assets. For this purpose, quantitative tightening and deficit spending are equally important because both fulfill the same function.
In this article, I want to provide more quantitative detail to my previous points which have been mostly qualitative in nature. I will also explain how this is relevant to the current debt ceiling issue.
TLDR Summary
Since April 2022, the Fed has fed the private sector with $2.1tn in securities while the Treasury has supplied $5.2tn in securities through its issuance ($2.3tn of which being bills). Investors have used this as a collateral to bid up risk assets which has fueled this powerful bull market.
Both of these sources of no/low risk assets are currently drying up. The Fed will reduce its annual rate of quantitative tightening to $480bn in April, which is just over half of its peak of $900bn. Further rate cuts will put more pressure on its pace over the course of this year. And the Treasury’s issuance is limited because they have hit their debt ceiling which officially prohibits further issuance. This issue will likely linger on for several months. The Treasury won’t run out of money until late summer and Washington loves to play its games until the last minute.
With less supply of no/low risk assets, investor risk appetite will likely get under pressure. It’s obviously not the only factor that can push asset prices up, but it has been a very important one over the last few years. The stock market will therefore likely struggle more.