(Bloomberg) -- US policymakers were advised this week by an influential panel of bond market participants to pay attention to the deteriorating federal budget, with investors demanding steeper premiums to buy the government's longer-term securities.
“Effectively, while there is still reasonable demand for US Treasuries from many domestic and international market participants, it has not kept pace with the increase in supply,” according to a Treasury Borrowing Advisory Committee analysis released on Wednesday.
Treasury Secretary Janet Yellen, who last week played down the impact of bigger supply in driving a months-long selloff in longer-term Treasuries, met with the TBAC panel on Tuesday. The group includes major bond market participants such as Citigroup Inc., JPMorgan Chase & Co., BlackRock Inc. and Pacific Investment Management Co.
One of Yellen's top lieutenants, Josh Frost, the Treasury's assistant secretary for financial markets, on Wednesday reiterated Yellen's analysis, which highlighted that higher long-term yields are a global phenomenon and not unique to the US. Frost also expressed confidence in demand for Treasuries, saying it had been quite strong in the government's auctions.
Nevertheless, TBAC advised Yellen in a report to the Treasury chief that “there is a view among market participants that the growing imbalance between supply of and demand for US Treasury debt may also have contributed to the selloff.”
Refunding Plan
Treasury officials decided, in their quarterly debt-sale plan released Wednesday, to step up sales of longer-term securities by slightly less than most major dealers had expected. Treasury also said it expects just one more quarterly boost to such issuance, a more constrained outlook than some had anticipated.
The decisions occur against a backdrop of sharply higher yields, with 10-year securities as of Wednesday at around 4.81%, compared with 3.96% at the end of July — before the Treasury boosted its long-term debt issuance plan for the first time in more than two years. Yields tumbled on Wednesday after the Treasury's issuance plan, known as the quarterly refunding, was released.
A key reason for the increase in yields is the higher compensation that investors are now demanding to buy longer-term Treasuries instead of just purchasing short-term securities and rolling those over — a concept known as the term premium.
“The Committee also felt that the return of term premium served to emphasize the importance of fiscal sustainability,” TBAC said in its report to Yellen. “Both gross debt outstanding and debt servicing costs are projected to increase meaningfully, and that should increasingly be a consideration for policymakers.”
TBAC analysis also showed that stronger economic data have played a role in the rise in yields. By contrast, expectations for tighter Federal Reserve policy over time “have only had limited pass-through into longer term yields,” the analysis showed.
--With assistance from Liz Capo McCormick and Alexandra Harris.
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