The recent turbulence in the Treasury bond market has led to concerns about demand. However, Goldman Sachs reveals that households have emerged as significant buyers, now accounting for 9% of outstanding US Treasury bonds. This surge in household demand has helped offset net declines from other sectors, such as the Federal Reserve and mutual funds. As a result, Goldman Sachs predicts that yields will remain contained, driven by the attractive risk/reward profile of Treasury bonds. Nonetheless, the high yields may exert downward pressure on equity demand in the future, particularly through moderate selling by households. Furthermore, Goldman Sachs foresees significant equity offloading by pensions and mutual funds, which will be partly offset by foreign investors and US corporations as net buyers. Overall, household demand for Treasury bonds proves instrumental in keeping yields under control while potentially impacting the equity market.
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Households’ Demand for Treasury Bonds Helps Keep Yields Contained
Today’s yields are high enough to bring back bond buyers, says Goldman Sachs
According to Goldman Sachs, the current yields in the market are attractive enough to entice bond buyers back into the market. Despite the recent sell-off in Treasury bonds, new buyers are entering the market to help keep a lid on yields. This renewed interest in bonds is a positive sign for the market and indicates that investors are willing to take on debt at higher yield rates.
Households now own 9% of outstanding Treasurys
An interesting trend has emerged in the bond market, with households becoming increasingly prominent as buyers. Currently, households own 9% of outstanding US Treasury bonds, a significant increase from the 2% ownership at the beginning of 2022. This surge in household ownership has helped offset the declines in ownership from other entities, such as the Federal Reserve, mutual funds, and ETFs.
Surging bond demand may put downside pressure on equities
While the increased demand for Treasury bonds is positive for the bond market, it may have negative implications for the equity market. The surge in bond demand could potentially lead to a decrease in equity demand, as investors shift their focus towards the relatively safer bond market. This downside pressure on equities could impact the performance of the stock market in the coming year.
Massive sell-off in Treasury bonds
Over the past few weeks, there has been a significant sell-off in Treasury bonds. This market decline has caused concern among investors and has contributed to market volatility. However, despite the sell-off, new buyers are entering the market to help stabilize yields and mitigate the impact of the decline.
New buyers are coming in to help keep a lid on yields
Despite the market sell-off, new buyers are stepping in to help keep Treasury yields contained. This influx of buyers, particularly from households, is crucial in maintaining stability and preventing yields from skyrocketing. The presence of these new buyers provides a positive outlook for the bond market and indicates that there is still confidence in the value of Treasury bonds.
Households accounted for 73% of net Treasury purchases from 2022 through Q2 2023
Households have played a significant role in the bond market, accounting for 73% of net Treasury purchases from 2022 through the second quarter of 2023. This substantial contribution by households has helped offset the decline in purchases from other entities such as the Federal Reserve, mutual funds, and ETFs. The active participation of households in the bond market is a positive indication of their confidence in Treasury bonds.
Treasury yields likely to remain contained
Goldman Sachs predicts that Treasury yields will continue to remain contained due to the attractive risk/reward ratio associated with owning Treasury bonds. Yields on these bonds are currently higher than the potential growth rate of the economy, making them an appealing investment option for risk-averse investors. This expectation of contained yields bodes well for the bond market and reinforces the value of Treasury bonds as a secure investment option.
Recent lackluster Treasury auctions a reflection of US fiscal policy worries
The lackluster performance of recent Treasury auctions is a reflection of concerns regarding US fiscal policy. The ballooning deficit has forced the Treasury to issue a substantial number of bonds, which has raised worries among investors. These concerns about the US fiscal policy have influenced investor behavior and impacted the demand for Treasury bonds. However, this lackluster performance does not indicate a supply-demand imbalance in the market.
No supply-demand imbalance in the market
Despite the concerns about recent Treasury auctions, analysts do not see any supply-demand imbalance in the market. While the demand for Treasury bonds may have been affected, there is still a healthy demand for these bonds. The presence of new buyers, including households, helps to balance the supply and demand dynamics in the market and prevent any significant imbalances.
High yields could put downside pressure on equity demand moving forward
One potential consequence of the high yields in the bond market is the potential downside pressure on equity demand. As Treasury bond yields become more attractive, investors may shift their focus towards bonds and reduce their demand for equities. This shift in demand could impact the performance of the equity market in the future. However, it is important to note that this is a potential outcome and not a certainty.
Households expected to engage in moderate selling through 2024
Looking ahead, Goldman Sachs expects households to engage in moderate selling of Treasury bonds through 2024. This projection indicates that households may gradually reduce their ownership of Treasury bonds over the next few years. The reasons behind this moderate selling are not explicitly mentioned but could be attributed to various factors such as changing investment strategies or diversification.
Pensions expected to sell $250 billion in equities next year
In addition to households, pensions are also expected to have an impact on the equity market. Goldman Sachs predicts that pensions will sell $250 billion in equities next year, following a significant offloading of $315 billion in stocks this year. This substantial selling by pensions could further contribute to the downward pressure on equity demand.
Mutual funds expected to sell $250 billion in equities
Mutual funds are another significant player in the equity market, and they are also projected to sell $250 billion in equities next year. The combination of selling by pensions and mutual funds could significantly impact equity demand and potentially contribute to market volatility.
US corporations expected to be net buyers of $550 billion next year
Despite the expected selling from households, pensions, and mutual funds, US corporations are projected to be net buyers of $550 billion in stocks next year. This anticipated buying by corporations provides some optimism for the equity market. However, it remains to be seen how these projections play out and how they will ultimately impact the overall equity market.
In conclusion, the increasing demand for Treasury bonds from households has helped keep yields contained and stabilize the bond market. While the surge in bond demand is positive for bonds, it may put downward pressure on equity demand. The recent sell-off in Treasury bonds has raised concerns but does not indicate a supply-demand imbalance. As households and other entities engage in moderate selling, it will be interesting to see how the market dynamics evolve and how they impact both the bond and equity markets in the coming years.