Here It Comes

What Happens in Treasuries Doesn't Stay in Treasuries

The pickup in U.S. funding costs is starting to be felt across the globe.
Mike Theiler/Pool via Bloomberg

President Donald Trump's $1.5 trillion of tax cuts have to be funded somehow. Step forward ever more U.S. Treasury bills and notes. As the bulk of the new supply is coming at five-year maturities or less, that's having a pronounced effect on the U.S. yield curve. And markets on the other side of the world are starting to feel it.

The U.S. Treasury two-year note yield has more than doubled in the last year to 2.4 percent. Over the same period the 10-year note has risen at only half the pace -- it now yields only 43 basis points more than the two-year, the narrowest gap since 2007.

Flattening Curve

Over the last year two-year yields have risen at twice the pace of 10-year pushing the curve flatter

Source: Bloomberg

This flattening pressure is unlikely to abate as supply comes down the pipe -- and redemptions won't be around to match. This month isn't so bad. The record $900 billion of U.S. Treasury issuance will only amount to $7 billion of net new sales. The net balance jumps to $58 billion in May.

Gross and Net U.S. Treasury Supply

Although there are humps in redemptions overall U.S. Treasury issuance is increasing

Source: U.S. Treasury Borrowing Advisory Committee, Bianco Research

And it will probably get worse from there. Though the Treasury Borrowing Advisory Committee only gives a few months' forward notice on its requirements, it would be a miracle if its next update, on May 2, showed issuance dropping. 

The Federal Reserve is only making matters worse. Over the next two years it will reduce its balance sheet by over $1 trillion. Combined with quarterly 25 basis point rate hikes, the pressure on the short end shows no signs of abating.

This is starting to show up in global markets. A few countries are providing early warning about what much of the rest of the world might soon expect.

Unusually, the minutes published April 3 of the Reserve Bank of Australia's policy decision said higher U.S. money market costs had driven short-term domestic borrowing costs higher.

Aussie Impact

Rising U.S. dollar funding costs are making themselves felt as far away as Australia

Source: Bloomberg

It also pointed out this had been happening in other regional markets, without naming them, though the likely culprits are Hong Kong and Singapore.

Asian Contagion

Higher U.S. rates are starting to feed through across the major Asia money centers

Source: Bloomberg

Emerging markets are particularly vulnerable to changes in U.S. rates since they're heavily reliant on dollar funding. In Asia the difficulties might be felt quite widely, as dollar-denominated debt issuance has ballooned in recent years.

Boom Market

The dollar new issue bond market in Asia has risen seven fold since 2011

Source: Bloomberg

Note: Syndicated issuance by all issuer types in Asia, though the bulk is from companies

The Hong Kong and China property markets, which have a lot of dollar funding, should be monitored very carefully to gauge the impact of changes in U.S. rates. The bubble in the former is truly spectacular -- the median property price is 19 times average income. 

China Real Estate Bond Bubble Brewing

Real estate bond supply in U.S. dollars has risen nine times since 2011

Source: Bloomberg

2018 is year to date

For these, and other borrowers, pressure on dollar funding globally is not going away. The pain is only going to deepen and spread. This is a big deal for emerging markets, which are often heavily reliant on the greenback. 

Even if the Fed were to take its foot off the rate-hike pedal or otherwise dial down its push to tighten policy, the tax cuts are not going to be reversed. What happens in Washington won't stay in Washington.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Marcus Ashworth in London at

    To contact the editor responsible for this story:
    Jennifer Ryan at

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