Treasury Auctions: Domestic Investment Funds Lead the Way

by Warren Seah

According to Oxford Economics, domestic investment funds have become the primary buyers of Treasurys sold at auction. In fact, these funds have accounted for approximately 76% of July’s Treasury auction supply, setting a new record share for the fourth consecutive month. In contrast, foreign allotments have shown weaker interest.

As John Canavan, lead analyst at Oxford Economics, explains, investment funds have steadily increased their demand for Treasury coupon auctions, especially since auction sizes started declining in late 2021. However, the market’s ability to absorb the increased Treasury coupon issuance relies heavily on sustained demand from domestic investment funds.

To meet the needs created by the prolonged debt-ceiling battle, BofA Global’s rates team forecasts that Treasury bill issuance will reach $728 billion in the third quarter and $402 billion in the fourth quarter. This substantial amount will help replenish the depleted Treasury cash account.

While this issuance would bring the total for the second half of 2023 to $1.13 trillion, slightly below the Treasury’s own forecast of $1.3 trillion, BofA Global believes it can be effectively absorbed by the market.

Yung-Yu Ma, chief investment officer at BMO Wealth Management, echoes this sentiment. During a phone interview, Ma expressed confidence that the increased issuance will be digested relatively well. He points out that U.S. rates continue to remain favorable compared to those of other developed countries, making safe, high-yield debt appealing. Short-term Treasury securities offer attractive yields in this regard.

Yields on Short-Term Treasury Securities Show Stability

Yields on short-term Treasury securities with a maturity of less than a year have remained relatively steady in the past week. According to FactSet, the 1-month bill rate BX:TMUBMUSD01M stood at 5.34% on Friday.

Greater Movement in the 10-Year Treasury Yield

In contrast, the 10-year Treasury yield BX:TMUBMUSD10Y experienced more significant fluctuations this week. Briefly surpassing 4.2%, the yield climbed higher following Fitch’s decision to downgrade the U.S.’s top AAA rating and the Treasury’s $1 trillion funding estimate for the third quarter.

Implications of the 10-Year Yield

The 10-year yield being above 4% signifies the potential for continued upward movement in rates, according to BMO’s Ma. He believes a range of 3.8% to 4.2% for the yield would be favorable for equities. However, a substantial drop in the benchmark yield may indicate a deeper economic weakness.

Stock Market Performance

While stocks saw an increase on Friday, the S&P 500 index SPX, Dow Jones Industrial Average DJIA, and Nasdaq Composite Index COMP remained on track for weekly declines, as reported by FactSet.

No Imminent Recession

Ma does not foresee a recession in the near future. Despite it being an unpopular opinion, he still maintains that the conditions for a soft landing are present, thanks to the labor market acting as a buffer against Fed interest rates.

Read: U.S. adds 187,000 jobs in July and points to hiring slowdown. Wages still high

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