The Bond Market Proves the Doubters Wrong. Again.

Can we finally stop doubting the bond market? Last year was supposed to be when the bond market finally “broke,” as interest rates rose, the Federal Reserve started to shrink its balance sheet and a ballooning budget deficit caused the U.S. to more than double its borrowing to $1.34 trillion. And yet the Bloomberg Barclays U.S. Treasury Total Return index managed to gain 0.86 percent. That’s nothing to brag about, but it’s far from the carnage predicted. As a result, bond market naysayers just pushed back their predictions of doom to 2019. And although it’s still early days, it’s looking as if the bears may be wrong again.

Despite predictions that annual new issuance will range from $1.25 trillion to $1.4 trillion over the next four years, bond sales so far in 2019 are off to a robust start. Even with the U.S. poised to borrow some $320 billion this week alone in bills and notes, demand at the government’s auctions on Monday of two- and five-year securities was in line with the average over the past 36 months. The one thing many bears tend to overlook is the role of the dollar. The greenback is by far the world’s primary reserve currency, with a 61.9 percent share compared with 20.5 percent for the euro. That creates inherent demand for Treasuries. James McCormick, the global head of desk strategy at NatWest Markets, wrote in a research note Monday that he had just returned from a trip to Asia, where “investors seem to care about the massive Treasury supply.” It’s even possible that the rising supply of Treasuries could spur demand rather than diminish it, according to Torsten Slok, Deutsche Bank’s chief international economist. As Slok sees it, the dollars going into Treasuries would otherwise have gone into more productive uses such as credit and equity markets. Logic suggests that as riskier assets struggle, risk-free assets such as Treasuries should do better.