Treasury Scarcity to Grow as Fed Buys 90% of New Bonds

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Even as U.S. government debt swells to more than $16 trillion, Treasuries and other dollar fixed- income securities will be in short supply next year as the Federal Reserve soaks up almost all the net new bonds.The government will reduce net sales by $250 billion from the $1.2 trillion of bills, notes and bonds issued in fiscal 2012 ended Sept. 30, a survey of 18 primary dealers found. At the same time, the Fed, in its efforts to boost growth, will add about $45 billion of Treasuries a month to the $40 billion in mortgage debt it’s purchasing, effectively absorbing about 90 percent of net new dollar-denominated fixed-income assets, according to JPMorgan Chase & Co.Enlarge imageThe Marriner S. Eccles Federal Reserve building stands in Washington, D.C., U.S. Photographer: Andrew Harrer/BloombergEnlarge imageBarack Obama, US president, warned of “prolonged negotiations.” Photographer: Andrew Harrer/BloombergEnlarge imageWalt Disney sold a record amount of debt last week at the lowest interest cost it’s ever paid. Photographer: Jonathan Alcorn/BloombergEven after U.S. public borrowings outstanding grew from less than $9 trillion in 2007 as the U.S. raised cash to pay for spending programs designed to pull the economy out of the worst financial crisis since the Great Depression, rising demand coupled with a drop in net supply means bonds will be scarce.“The shrinking amount of bonds in the market is lowering rates and not just benefiting the Treasury, but providing lower rates for private-sector decision-makers as well,” Zach Pandl, a senior interest-rate strategist in Minneapolis at Columbia Management Investment Advisers LLC, which oversees $340 billion, said in a Nov. 30 telephone interview. “The Fed is not creating this scarcity to help out the Treasury, it’s primarily to get the economy going.”

Treasury Auctions

Investors bid for more than four times the amount of two- year notes the Treasury auctioned last week, matching a record high, data compiled by Bloomberg show. Yields on U.S. government bonds are about a half a percentage point lower than the rest of the world on average, compared with about a quarter-percentage point more as recently as April 2010, Bank of America Merrill Lynch indexes show.Buyers range from central banks to financial institutions stocking up on high-quality assets to meet the Dodd-Frank financial-overhaul law and global regulations set by the Bank for International Settlements. They’re helping the Fed and the Obama administration keep borrowing costs at all-time lows for everyone from consumers toWalt Disney Co.Strategists have cut their forecasts for 10-year Treasury yields. They now see the benchmark yield at 2.26 percent by the end of 2013, down from the 2.79 percent predicted in June, based on the median estimate of about 50 analysts in separate surveys by Bloomberg. The yield has averaged 4.88 percent average since Bill Clinton began his first term as President in 1992.

Falling Yields

U.S. 10-year yields fell seven basis points, or 0.07 percentage point, last week to 1.62 percent inNew York, according to Bloomberg Bond Trader prices. The yield rose less than two basis points to 1.63 percent at 12:35 p.m. in New York.Bonds rose as President Barack Obama and Republican lawmakers traded ideas on how to avoid more than $600 billion in mandated spending cuts and tax increased scheduled to go into effect in January.Obama warned Nov. 30 of “prolonged negotiations,” while U.S. House Speak John Boehner said the administration plan presented to congressional leaders by Treasury Secretary Timothy F. Geithner would risk growth by raising taxes on small businesses.

$31.3 Trillion

http://www.bloomberg.com/news/2012-12-03/treasury-scarcity-to-grow-as-fed-buys-90-of-new-bonds.html