More Long Bonds From the U.S.? Not a Problem for the Fed
The central bank has the tools necessary to keep yields from rising due to the increased supply of debt.
The Fed needs to follow through.
Source: Bloomberg
The U.S. Treasury is now issuing more longer-term debt to finance the $3 trillion budget deficit, raising the possibility that yields on those maturities will rise as investors demand greater compensation to swallow the additional supply.1 But the Federal Reserve is trying to suppress longer-term yields to support the economy. Which side will win out? Let’s just say that I’m wary more debt issuance alone would trigger a sustained rise in yields and, ultimately, borrowing costs in the economy.
The Fed seeks to keep financial conditions loose and accommodative through a combination of setting the policy interest rate at about zero, forward guidance to convince market participants that rates will remain at zero for years, and large-scale purchases of Treasuries and related securities. In the initial phase of the crisis, asset purchases were intended to support market functioning. Since then they have evolved into providing financial accommodation by depressing term premiums and pushing investors into riskier assets.