Impact of Treasury Supply Concerns on Market Trends

The 10-year Treasury yield has breached 4.6%, climbing steadily even as recent CPI data came in below expectations and growth indicators cooled. So what’s behind the divergence? 📉 It’s not about the economy—it's about supply and structural demand. 👉 The U.S. government is issuing record amounts of debt to fund persistent deficits. 👉 Foreign central banks, traditionally key buyers, have stepped back. 👉 Domestic demand (pensions, insurers, and retail) is no longer absorbing new issuance at prior levels. 👉 Meanwhile, the Fed is still reducing its balance sheet via Quantitative Tightening, effectively withdrawing support from the long end of the curve. 📌 What does this mean for markets? • Mortgage rates are under pressure again, already nearing 7.2% for 30-year fixed loans—posing risks to housing affordability and demand. • Liquidity in the bond market is thinning, with wider bid-ask spreads and less depth—a concern for both primary dealers and asset managers. • Risk assets, particularly long-duration tech and growth stocks, are facing valuation headwinds as discount rates rise. 💡 Unlike previous cycles, rising yields aren’t translating into dollar strength—recent sessions have shown a synchronized pullback in U.S. equities, Treasuries, and the dollar, reminiscent of the 2022 late-cycle tightening phase. #Treasuries #BondMarket #QuantitativeTightening #MortgageRate #FixedIncome #LiquidityRisk

I remain quite concerned with recent movements in #asset prices and am not mollified by the arguments that short-term trade position unwinding is the major motivator for what we see. Trade position unwinding of this type seems to be a relevant factor but we have seen such trade unwinding in other events and asset prices, in general, have not behaved like that. In light of recent market developments following President Trump's "Liberation Day" tariff decisions, I continue to entertain the view that financial markets are increasingly showing signs of more structural and lasting shifts. Notably, US Treasury #bonds, traditionally viewed as the ultimate #safe-haven asset, have been displaying behavior reminiscent of riskier #securities. Unlike previous episodes of global uncertainty—where Treasuries consistently rallied—recent days have seen simultaneous declines in Treasuries, equities, and other traditionally risky assets. This divergence from historical norms suggests some reassessment by global investors of the underlying safety and reliability of #US government #debt. If that continues, the implications of these movements extend well beyond short-term #volatility. Persistent fiscal deficits and unpredictable tariff policies are exacerbating doubts about the US's commitment to disciplined economic management, potentially undermining long-term investor confidence. Of that, I have no doubt. This erosion is reflected clearly in #Treasury #yields, particularly at longer maturities, and the noticeable retreat of foreign investors from US assets. Given the pivotal role US Treasuries play as global financial benchmarks and collateral, these structural shifts could indicate a more lasting recalibration of market sentiment and risk perceptions surrounding US debt and assets more broadly. How structural and deep this recalibration is I do not know. My bottom line for now: something more structural is happening in the market but I do not know the extent of it. As a wise man once said: when facts change, I change my point of view. So, nothing is written in stone.

U.S. financial markets have shown clear signs of capital flight in 2025, with simultaneous declines in the S&P 500 and the U.S. dollar, as well as pressure on U.S. Treasurys, which have strayed from their traditional safe-haven status. A recent Wall Street article also indicates a dramatic shift (https://shorturl.at/6LJ2c) with global fund managers having rapidly moved from a strong overweight position in U.S. equities to a record underweight. WSJ is citing fears of a "crash in the dollar due to an international buyers' strike" and a new "risk premium" on U.S. assets The main triggers are President Trump’s aggressive tariff policies and public conflicts with the Federal Reserve, which have injected unprecedented uncertainty and volatility into markets. Trump's tariffs, especially the sweeping "reciprocal" tariffs announced in April 2025, have disrupted global investment patterns, caused a sharp drop in stock prices, and undermined the dollar's safe-haven appeal. Investors are also anxious about the U.S.'s ability to finance large budget and current-account deficits, especially as foreign purchases of U.S. assets decline. Analysts warn that the capital outflows are not over, and the weakening of the dollar is likely to persist as long as policy unpredictability and trade tensions continue. Some experts highlight that Trump's unpredictability and threats to financial contract sanctity (such as rumored forced conversions of Treasury bonds) are further eroding foreign investor confidence. While the U.S. has deeper markets than typical capital flight victims, sustained outflows at 2025’s scale could compound into a structural economic shift comparable to post-Bretton Woods adjustments. The key differentiator from emerging market crises would be the dollar’s lingering inertia, potentially cushioning but not preventing long-term erosion of financial primacy. Importantly to note is that capital flight leads to higher U.S. Treasury yields because foreign and domestic investors sell off Treasurys, reducing demand for these bonds. As a result, the U.S. government must offer higher interest rates (yields) to attract buyers, increasing its borrowing costs. This dynamic has been clearly visible in 2025, with yields on 10-year Treasurys rising from about 4% to 4.5% as investors exit U.S. assets amid trade tensions and uncertainty. A sustained rise in Treasury yields can have several consequences: - Increases government debt servicing costs. - Raises borrowing costs for businesses and households. - Signals reduced confidence in the U.S. as a safe-haven, especially if capital flight is driven by concerns over fiscal deficits and unpredictable policy. This environment is unusual, as Treasury yields are rising even while the dollar weakens, highlighting the seriousness of the capital outflows and the challenge to the U.S.'s traditional financial stability.

The 10 Year U.S. Treasury Yield Is Repricing Risk Across Markets - Over the past week, the U.S. 10-Year Treasury Yield has remained elevated despite intermittent risk off sentiment. This is not a typical cycle driven move but a structural repricing of duration risk driven by inflation expectations, fiscal concerns, and weakening market liquidity. - Market risk is shifting. Duration is no longer a passive hedge. The correlation between equities and bonds has become unstable, with both declining simultaneously in recent sessions. Strong macro data continues to support a higher for longer narrative tied to the Federal Reserve, making yields highly sensitive to even small economic surprises. - At the same time, liquidity conditions are deteriorating. Weak Treasury auction demand, constrained dealer balance sheets, and reduced market depth are amplifying price movements. This creates a feedback loop where higher volatility reduces liquidity, which in turn pushes yields higher. - This convergence of market risk and liquidity risk is critical. It leads to higher volatility in benchmark rates, reduced hedging effectiveness, and increased probability of forced deleveraging across portfolios. - For risk managers, this environment requires a shift in approach. Duration assumptions must be recalibrated and historical correlations should not be relied upon. Liquidity adjusted risk metrics need to be incorporated alongside traditional models. Funding and collateral stress testing becomes essential as rising yields can trigger margin pressures. Monitoring Treasury market microstructure such as auction demand and dealer positioning is now key to identifying early signs of stress. Maintaining liquidity buffers and reducing leverage sensitivity is critical. - The key takeaway is clear. When the risk free rate becomes volatile, it changes the foundation of asset pricing across all markets. #MarketRisk #LiquidityRisk #FixedIncome #TreasuryYields #BondMarket #MacroEconomics #RiskManagement #FinancialMarkets #FederalReserve #Investing #InterestRates #PortfolioManagement #FinancialRisk

𝐆𝐨𝐯𝐞𝐫𝐧𝐦𝐞𝐧𝐭 𝐛𝐨𝐧𝐝𝐬, 𝐨𝐧𝐜𝐞 𝐚 𝐛𝐞𝐝𝐫𝐨𝐜𝐤 𝐨𝐟 𝐬𝐭𝐚𝐛𝐢𝐥𝐢𝐭𝐲, 𝐚𝐫𝐞 𝐧𝐨𝐰 𝐟𝐮𝐞𝐥𝐢𝐧𝐠 𝐠𝐥𝐨𝐛𝐚𝐥 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐮𝐧𝐜𝐞𝐫𝐭𝐚𝐢𝐧𝐭𝐲. The recent selloff in UK gilts, widening spreads on French OATs, and the Bank of Japan's retreat from yield curve control are not isolated events. They are early signs of a systemic breakdown in the credibility of sovereign debt. For more than 50 years, markets operated on a "𝐩𝐮𝐫𝐞-𝐟𝐢𝐬𝐜𝐚𝐥 𝐬𝐭𝐚𝐧𝐝𝐚𝐫𝐝", where trust in currencies and sovereign bonds was backed solely by a government's fiscal discipline. This fiat system, which replaced the Gold Standard, is now showing strains reminiscent of its predecessor's crisis in the late 1960s. Without a tangible backstop, the global monetary system relies entirely on political will to control debt and inflation — a will that is visibly eroding. A structural trap drives this fiscal decay: the return of escalating costs of 𝐠𝐞𝐨𝐬𝐭𝐫𝐚𝐭𝐞𝐠𝐢𝐜 𝐜𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐢𝐨𝐧 (as seen in Britain's case, 1700-1913), combined with the enormous expenses of non-discretionary 𝐰𝐞𝐥𝐟𝐚𝐫𝐞 𝐬𝐩𝐞𝐧𝐝𝐢𝐧𝐠. The default policy response will no longer be crisis management but a sustained strategy of 𝐟𝐢𝐧𝐚𝐧𝐜𝐢𝐚𝐥 𝐫𝐞𝐩𝐫𝐞𝐬𝐬𝐢𝐨𝐧 — holding real interest rates below inflation to erode debt. This "shadow default" will become the core fiscal strategy for many advanced economies, with the United States leading the way as its net interest costs consume an unprecedented share of the federal budget. 𝐅𝐨𝐫 𝐢𝐧𝐯𝐞𝐬𝐭𝐨𝐫𝐬, 𝐭𝐡𝐞 𝐜𝐨𝐧𝐬𝐞𝐪𝐮𝐞𝐧𝐜𝐞𝐬 𝐰𝐢𝐥𝐥 𝐛𝐞 𝐩𝐫𝐨𝐟𝐨𝐮𝐧𝐝. The repricing of sovereign risk is not a theoretical exercise; it is a real and active threat. This decay is unfolding along two distinct paths: some nations face sudden, emerging-market-style crises (such as the UK). In contrast, the US faces a gradual but inevitable erosion of fiscal credibility. Ultimately, if the cornerstone of modern finance is propagating instability, investors must ask: 𝐖𝐡𝐚𝐭 𝐢𝐬 𝐭𝐡𝐞 𝐭𝐫𝐮𝐞 𝐩𝐫𝐢𝐜𝐞 𝐨𝐟 𝐫𝐢𝐬𝐤 𝐰𝐡𝐞𝐧 𝐭𝐡𝐞 𝐛𝐞𝐧𝐜𝐡𝐦𝐚𝐫𝐤 𝐮𝐬𝐞𝐝 𝐭𝐨 𝐦𝐞𝐚𝐬𝐮𝐫𝐞 𝐢𝐭 𝐢𝐬 𝐟𝐮𝐧𝐝𝐚𝐦𝐞𝐧𝐭𝐚𝐥𝐥𝐲 𝐛𝐫𝐨𝐤𝐞𝐧? The old frameworks for portfolio construction are no longer fit for purpose. #markets #finance #economics

📉 Foreign Ownership of U.S. Treasuries Is in Long-Term Decline Did you know that foreign investors currently hold ~33% of U.S. Treasury securities? That might sound significant — and it is — but its not just the level that matters, its the direction of travel: ➡️ A decade ago, that number was closer to 50%. ➡️ The share has been in a steady, structural decline since 2014. Why does this matter? 🌍 Global central banks are no longer the price-insensitive buyers they once were. 🇨🇳 Countries like China and Japan have reduced their exposure, citing diversification, rising hedging costs, and geopolitical risk. 📈 Meanwhile, domestic buyers — U.S. households, institutions, and the Fed — have picked up the slack. But with deficits rising and issuance ballooning, can domestic demand alone support the market? This trend has major implications: 1. Interest rate volatility may increase as the marginal buyer changes. 2. The bond market becomes more sensitive to shifts in domestic liquidity and risk sentiment. 3. And over time, it challenges the assumption that the world will always have an insatiable appetite for U.S. debt. Something to keep a close eye on. 📊 The structure of Treasury demand is evolving — and with it, the implications for interest rates, fiscal policy, and markets. #Macroeconomics #USTreasuries #Geopolitics #FiscalPolicy #Markets #Investing #Dollar #BondMarket #GlobalEconomy #USDebt

·QE: The path of (future) least resistance? ·Despite #Fed cuts since Sept. 2024, long-term yields are rising, not falling. ·The culprit: term premium - investors demanding more compensation for duration amid sticky #inflation, rising #debt, & intermittent #Treasury liquidity strain. ·We’re moving deeper into, or perhaps we’re already in, an environment of fiscal dominance: higher debt-service costs, softer structural demand, and a Fed that may need to return to balance-sheet tools if growth slows and stress reappears. ·Large deficits keep net Treasury supply elevated while, based on recent Treasury auctions, traditional price-insensitive buyers have stepped back. ·If growth softens & inflation cools, private demand may not absorb supply without pushing yields higher. ·Disorderly moves in the Treasury market risk spilling into credit and tightening financial conditions despite rate cuts. ·In that environment, QE, QE-lite, or permanent facilities may become the only tools that can stabilize market function. ·The Fed sets the front end. The market sets the long end. #investing, #capitalmarkets, #FederalReserve, #yieldcurve

Goldman Sachs' Head of US Rates Strategy, William Marshall: "The impact of tariff policies could complicate the case for owning Treasuries as a hedge against volatility, given the possibility that tariffs could drive down growth while boosting inflation. This broad-based approach that we saw in terms of tariff policy introduced real concern that foreign investors might meaningfully pull back their support for Treasuries in aggregate. Given these cross currents, I think it’s useful to bear in mind that where the US is looking at potentially a very large inflation hit coupled with meaningful growth downside risks, outside the US, the balance skews a little bit more to the growth side of things." Investors had been focused on how much money tariffs could raise for the US budget (and therefore a potential reduction in the supply of government debt), they now seem to be more concerned about the prospect of a downturn, which could lead to higher government borrowing due to lower tax receipts and increased spending needs. This has been reflected in Goldman Sachs Research’s Treasury convenience factor, which measures the relative valuation of Treasuries versus alternative forms of duration such as swaps or other sovereign bond markets. A lower convenience yield usually reflects a less favorable supply/demand balance for US Treasuries (or investors anticipating a shift in that direction). The Treasury convenience yield fell sharply in April as trade tensions between the US and some of its biggest trading partners increased. https://lnkd.in/eX_pg4G7 #fiscalpolicy #taxcuts #deficits #budgetdeficit #inflation #treasuries #interestrates #economicgrowth #tariffs #tradepolicy #volatility #hedging #portfoliomanagement #riskmanagement #consumerspending #taxes

Despite some short-term relief from month-end rebalancing, we believe that government bond yields face upward pressure over the medium term from a supply/demand perspective. There are two duration shifts that present a headwind for government bonds over the medium term. The first duration shift has been taking place in demand and has to do with the retail impulse into bonds. The YTD pace in bond funds is tracking pace of around $450bn-$500bn, a sharp decline from the $1.36tr seen in 2024. The picture looks even more problematic for bond demand if one takes into account the duration impulse. Not only have bond fund inflows slowed sharply this year relative to 2024 but these inflows have shifted away from longer duration government or corporate bond funds towards short duration funds. In other words, there has been an even bigger decline in bond fund demand in duration terms. The second duration shift has been taking place in supply. While the duration impulse of corporate bond issuance has been flattening out as corporates reduced sharply the maturity of their issuance, the duration impulse of government bond issuance continues to rise widening its gap with corporate bond issuance. This is shown in the chart below which depicts the notional amounts of USD corporate bonds in 10y-equivalent terms along with the equivalent metric for the Treasury excluding Fed holdings. In other words, much of the duration supply has been stemming from government bonds rather than corporate bonds.

As a financial transactions practitioner, the last two weeks have been nothing short of fascinating. Trump appeared ready to stand his ground in the face of market turmoil and intense political pressure until the sleepy US Treasury Market started going haywire. Now that (some of) the smoke has cleared, I wanted to share a few observations: 1. Despite some calming of the markets, interest rates have not yet retreated with corporate bonds up 25 - 100bps from April 1st (with lower credit ratings getting hit with larger spikes - both in absolute and relative terms). This means that higher borrowing costs for consumer and corporate borrowers are likely the new normal--this is also true in the "risk free" US treasury markets. 2. Relatively speaking, rates and credit spreads are not above long term trends and so despite higher rates, I don't see cause for panic (yet). The market is absorbing and adjusting to this new "normal." 3. Whereas two weeks ago there was near certainty that the Federal Reserve would start significantly lowering interest rates, the case for lower rates has been weakened by the likely impact of higher prices caused by tariffs which is also contributing to the case for a new normal of higher borrowing costs. 4. Given all the above, we can surmise that the "smart" markets are predicting good news / bad news: while we likely won't see more major shocks to the economy, we will settle into a "new normal" of higher prices, interest rates, barriers to trade, and economic uncertainty. Credit markets are still functioning normally but with new embedded risk premia. What does this mean for #transferpricing (my wheelhouse)? In short, any companies that are engaging in intercompany financing, cash pooling, and liquidity management, need to review their pricing model so that transfer pricing policies are aligned with the new market realities that third-parties are facing. Reach out to any of our #pwcmiddleeast transfer pricing partners for more insights: Zeeshan Humayun, Yasmine Hammad, Steven Cawdron, Arun Saripalli, Andrew Joshi, Jorge Simões as well as my co-lead in financing transactions Parsa Pourankooh