30 Apr COTW: Bond Market Supply Exploding
The chart below can be downloaded here.
According to the Congressional Budget Office, the U.S. budget deficit could hit $1T by 2020. Higher deficits will add to the national debt, which is expected to jump more than 50% from over $21T to $33T in the next decade. To finance this, the U.S. Treasury will need to ramp up bond issuance. Over the next 5 years, in addition to nearly $6T in Treasuries, it is estimated that $4.8T of investment-grade and high yield bonds will need to be issued/rolled. Exacerbating an already challenging situation is the fact that the Fed plans to sell around $1T of bonds (per its current glide-path). We expect this explosion in the supply of bonds to pressure yields and—as all asset classes compete for the same fungible dollars—the demand for other financial assets.
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