By: Quincy Krosby, PhD, Chief Global Strategist, Lawrence Gillum, CFA, Chief Fixed Income Strategist, & Joshua Cline, Associate Analyst

As the Federal Reserve (Fed) continues with its Quantitative Tightening (QT) program, questions abound regarding the Treasury Department’s expanding funding needs. The QT program is designed to reduce the Fed’s balance sheet — now $7.7 trillion down from $9 trillion — after Treasury notes (mostly) were bought after economic concerns intensified during the COVID-19-related pandemic. Households and, perhaps surprisingly, foreign investors have been buyers recently, and with the amount of Treasury supply coming to market, both will need to keep buying.

According to recent data from the congressional budget office (CBO), total Treasury debt held by the public is expected to grow to over $46 trillion by 2033. The primary reason for the increase in expected debt issuance is an increase in spending. Per the CBO, the U.S. government is expected to run sizable deficits over the next decade in the tune of 5%–7% of Gross Domestic Product (GDP) each year. So, to fund those deficits, the Treasury Department needs to issue debt. And Treasury plans to issue a lot of debt. And, thus, the Treasury needs buyers.

At this point, the Fed is no longer a buyer of Treasuries. Pension funds, mutual funds, retail portfolios, institutional portfolios, and an assortment of exchange traded funds have been important domestic buyers. Foreign buyers continue to remain active buyers participating in Treasury auctions, but global central banks have not been as active in Treasury auctions as they once were.

With the national debt standing at $34.23 trillion and expected to grow, U.S. Treasury sales are the key to paying the carrying costs. Each auction is heavily monitored by fixed income and equity markets alike to see where the yield settles, as higher yields have a more negative effect on the overall economy.

Read the full commentary here: Weekly Market Commentary-02.20.2024