“Who Will Buy?” is the exuberant ensemble number from the 1962 musical hit Oliver! It is also the rallying cry of a number of investors and analysts who are worried about who exactly will be purchasing trillions of dollars worth of bonds as inflation bites and public deficits balloon.
Such concerns were on full show last week, when gilt yields soared after the UK government unveiled a mini-budget full of tax cuts that were expected to expand the UK’s debt burden. Prime Minister Liz Truss has since reversed the plan, but worries over the future attractiveness of a wide variety of bonds remains.
To understand the concern, look no further than the analysts at JPMorgan Chase & Co., who argue that buyers across a wide variety of debt — including even the US Treasuries which form the backbone of global markets — are stepping away.
“We remain concerned about the (lack of) structural demand for Treasuries,” wrote JPMorgan analysts led by Jay Barry and Srini Ramaswamy.
In fact, they say, all of the three main buyers for US government debt — commercial banks, foreign governments and of course the Federal Reserve itself — appear to have stepped away from the market. While some of the retreat is to be expected as the US central bank tapers its balance sheet, the scale of the shift in appetite is still noteworthy, they write.
They estimate that the Fed’s Treasury holdings have dropped by $180 billion year to date as the central bank embarks on quantitative tightening. Meanwhile, commercial banks’ collective holdings of Treasuries have fallen by $60 billion this year, after growing more than $700 billion in 2020 through 2021. And foreign governments are also stepping back, with official holdings having dropped $50 billion over the past six months.