Dramatically wider U.S. federal budget deficits, which stoked concerns about lower Treasury prices and higher yields as the supply of debt increased, are having the opposite effect, Williams said.

“You increase debt, and you’d think you’d increase yields in a dramatic way, but you’ve pulled forward growth from the future,” Williams said.

The longest-maturity Treasuries also have benefited from the government’s reliance mainly on shorter-maturity sectors to finance bigger deficits. Net issuance totaled $1.045 trillion in fiscal 2019, an increase of 31% from 2016. But while net bond sales increased by 33%, issuance of notes maturing in two- to
10-years doubled to $696 billion.

 

Eoin Treacy's view

The deflationary consensus is pervasive and ensured the Treasury did not suffer another failed bond auction this afternoon. Nevertheless, just because $1 trillion deficits are not awakening investors to the risks of wholesale currency devaluation that does not mean the situation will persist indefinitely.

The saving grace for the Treasury bond market is the fact that this is a global phenomenon where both the USA and China are running over 4% deficits are percentages of GDP. Europe by comparison has been chaste.

The downward dynamic on the 10-year Treasury future suggests some questioning of the bullish consensus. Downside follow through tomorrow would confirm a lower high. A break in the yearlong sequence of higher reaction lows would question the consistency of the broad uptrend.