Treasury Securities Insights

Book of the Week: The Treasury Bond Basis by Galen Burghardt & Terry Belton While this book delves deeply into a highly specific segment of the fixed income markets—treasury bond futures—its insights go far beyond that niche. Chapter 1, in particular, is a must-read for anyone working in or aspiring to understand the broader fixed income markets. It offers an accessible and insightful description of bonds, touching on crucial topics such as valuation, the assumptions behind bond redemption yield, interest rate risk, and accrued interest. First published in 1994, The Treasury Bond Basis by Galen Burghardt remains a timeless resource. Despite the evolution of financial markets, the principles laid out in this book continue to be relevant. It is both a practical guide for practitioners and an excellent educational tool for those seeking to understand complex concepts like basis trading and cash-futures arbitrage. Why you should read it: - Chapter 1 alone provides a foundational understanding of bonds, making it beneficial even for those who do not trade futures. - The book covers critical topics like the basis arbitrage between the Treasury Long Bond and the T-Bond futures contract, helping readers appreciate the dynamics of this market. - It combines theoretical insights with practical applications, offering clarity on the futures delivery process, basis risk, and valuation. Whether you are a seasoned professional or new to fixed income, the book’s structured approach to understanding the treasury bond market makes it an excellent learning tool. If you are specifically interested in basis arbitrage or understanding the mechanics of treasury bond futures, this book is a treasure trove of valuable insights. It is rare to find a resource that balances technical depth with accessibility as effectively as this one. Book Reference: https://tidd.ly/3Z33JAl

📈 A New Era for U.S. Treasury Yields Amid Rate Cuts The historical playbook for Federal Reserve rate-cutting cycles is being rewritten. Traditionally, rate cuts by the Fed result in declining yields on 10-year U.S. Treasury bonds, as seen in the average historical trend since 1984 (the dotted green line). However, 2024 is defying the norm. 🔸 Key Insights from the Data: • In prior rate-cutting episodes, 10-year Treasury yields typically dropped by about 1.5–2 percentage points within the first 32 weeks after the initial rate cut. • 2024 stands out: Instead of falling, yields have risen sharply, peaking at +1 percentage point just 16 weeks into the cycle (orange line). This divergence reflects unique market dynamics in 2024, possibly influenced by: 1️⃣ Persistent inflationary pressures: Investors may be demanding higher yields to offset inflation risks. 2️⃣ Geopolitical and macroeconomic uncertainty: These factors may challenge traditional fixed-income market behavior. 3️⃣ Changing market expectations: Market participants could be pricing in prolonged economic resilience or delays in further monetary easing.

📉 Foreign Ownership of U.S. Treasuries Is in Long-Term Decline Did you know that foreign investors currently hold ~33% of U.S. Treasury securities? That might sound significant — and it is — but its not just the level that matters, its the direction of travel: ➡️ A decade ago, that number was closer to 50%. ➡️ The share has been in a steady, structural decline since 2014. Why does this matter? 🌍 Global central banks are no longer the price-insensitive buyers they once were. 🇨🇳 Countries like China and Japan have reduced their exposure, citing diversification, rising hedging costs, and geopolitical risk. 📈 Meanwhile, domestic buyers — U.S. households, institutions, and the Fed — have picked up the slack. But with deficits rising and issuance ballooning, can domestic demand alone support the market? This trend has major implications: 1. Interest rate volatility may increase as the marginal buyer changes. 2. The bond market becomes more sensitive to shifts in domestic liquidity and risk sentiment. 3. And over time, it challenges the assumption that the world will always have an insatiable appetite for U.S. debt. Something to keep a close eye on. 📊 The structure of Treasury demand is evolving — and with it, the implications for interest rates, fiscal policy, and markets. #Macroeconomics #USTreasuries #Geopolitics #FiscalPolicy #Markets #Investing #Dollar #BondMarket #GlobalEconomy #USDebt

📉 Something’s changed in the US Treasury market—and it’s not just about inflation, Fed policy, or a hot economy. Over the last few months, we’ve seen the long end of the curve behave in ways we haven’t seen before. It’s not just volatility — it’s the entire narrative that’s being challenged. Yes, yields are rising. Yes, that affects everything from mortgages to equity valuations. But look closer, and you’ll see a deeper shift taking shape. After a decade-long bull run in the dollar, with global investors stuffed full of US equities and Treasuries, we’re now seeing signs of diversification away from USD assets. This isn’t abandonment. It’s rebalancing. But it seems to be structural. Why? Tariffs. Trade friction. Fiscal uncertainty. And here’s the twist: it might not be just China. US allies could also be taking a step back. And they hold more Treasuries than China does. So while many still see Treasuries as the risk-free cornerstone of global finance, the market is starting to say otherwise. The price of safety is rising. If you’re long anything—equities, private assets, even real estate—you need to know where bond yields are going and why. Because that’s where the story starts. #CIOinsights #wealthmanagement #privatebanking (when investing, your capital may be at risk)

🔴 After yelling at Yellen, Bessent is now following the Yellen path. Bessent wants to fill the Treasury General Account (TGA)—the government's bank account—to $500- $800 billion before the end of July. To refill the TGA, the Treasury Department will issue very short-term bonds: 4-week and 8-week maturities. But why is the Treasury now refilling the TGA with short-term bonds when it harshly criticized former Treasury Secretary Janet Yellen for front-loading trillions of dollars in debt? It’s not because Yellen was right or Bessent was wrong, but because the foundation of the market structure has changed. There are basically 2 types of securities in the Debt Market: Short-term bonds, which mature in less than a year, and long-term bonds, which mature in more than a year—up to 30 years. Short-term bonds (which make up the front end of the yield curve) are often referred to as “on-the-run” securities. They are more liquid, more in demand, and widely used as collateral by financial institutions for interbank lending. In contrast, long-dated bonds—called “off-the-run” securities—are less liquid, less desirable, and not often used for collateral in intra-financial transactions. They tend to sit on balance sheets, and the market demands a discount on them due to their illiquidity. The key point is: the market holds a wide range of bonds across the yield curve. But after the massive COVID-era money printing, when bondholders lost up to 30% of their value, investors have become more cautious—especially with long-term bonds, because they’re less liquid. In simple terms, after COVID, the market lost its appetite for long, off-the-run bonds. It now prefers short, liquid, on-the-run bonds. The shorter the maturity, the stronger the demand. The market today is addicted to liquidity, much like a drunk man to alcohol. As the Treasury needs trillions to plug the deficit, and the market prefers short-term bonds, it’s now issuing ultra-short 4- and 8-week securities. The Treasury is no longer doing what it should—it’s doing what it can. Short-term, on-the-run bonds increase liquidity and help keep long-term yields low. If the government issued long bonds instead, yields would rise sharply. So in effect, this is a form of yield curve control. In the end, all roads lead back to QE /YCC—both of which mean printing money and increasing liquidity. But neither has truly worked, and Japan is the clearest example of that. Now, more and more debt is moving to the short end of the yield curve. And as demand for U.S. bonds declines—especially from foreign buyers—the burden will shift increasingly to domestic holders. U.S. banks, financial firms, and savings institutions will be forced to buy more. When they reach their limits, the Fed will step in and buy the bonds—just as the Bank of Japan is doing today. It’s all financial engineering, but it doesn’t truly help a nation. America needs Real Engineering.

The US Fiscal Firehose: Why Bond Yields Are Watching Washington, Not Just the Fed Markets talk about the Fed. But yields? They’re watching Congress. You can see it in the numbers—deficits are now permanently high, even outside of crisis years. The US is projected to run 5-6% deficits through the next decade, and that’s before you include the likely extension of the Trump tax cuts. We’ve been here before—2008, 2020. Huge deficits, but yields dropped because of panic. This time’s different. No emergency. Just bad math. And the bond market is noticing. 10-year Treasury yields are hanging near 4.5%, even as inflation cools. Moody’s just joined S&P and Fitch in downgrading US credit. And the CBO says we could hit 216% debt-to-GDP by 2054. Here’s the takeaway: Fiscal policy is now a market risk. And the long end of the bond curve is acting like it knows it. This is no longer just a central bank story—it’s a fiscal one. Something investors (and allocators) need to actively watch. We cover this and more in our Nomura CIO Corner: https://lnkd.in/e4TCax_g Shoutout to Tathagata Bhar Anuragh Balajee Dhrumil Talati for their sharp inputs on the numbers and narrative. #CIOInsights #BondMarket #USTreasuries #FiscalDeficit #MacroLens #NomuraIWM #FixedIncome #DebtSpiral #MarketsWatchPolicy #CBOData

The Treasury yield curve serves as a critical barometer for the economy, providing valuable insights into market expectations, Federal Reserve policies, and overall economic well-being. This indicator maps out the interest rates of U.S. Treasury securities across various maturities, ranging from short-term to long-term durations. Typically, a normal yield curve indicates stable growth and increasing inflation, while a flattening curve signifies uncertainty, often observed during economic transitions. The most alarming scenario is an inverted yield curve, where long-term yields dip below short-term yields. This phenomenon historically precedes recessions, signaling investor apprehensions about future economic slowdowns and their shift toward the security of long-term bonds. Analyzing Treasury yield data from 1975 to the present unravels how the curve reacts to economic cycles. In past recessions like those in 2008 and 2023, the curve inverted, forewarning of imminent downturns. Conversely, during economic upswings like the mid-2000s, the curve steepened, reflecting optimism and escalating interest rates. As central banks grapple with inflation, interest rates, and financial risks, the yield curve's shape remains a potent indicator for investors, policymakers, and businesses. Given the current market fluctuations and policy landscapes, it is imperative to closely track the movements of the yield curve. #Finance #Investing #Economy #YieldCurve #TreasuryBonds #MarketTrends