In focus

Shifting US Treasury market signals move into uncharted waters

It has been an extraordinary year in the financial markets. Even the US Treasury market, the largest and most liquid market in the world, experienced unprecedented turbulence in March. While most asset prices have recovered swiftly, the costs of mitigating the economic impact of the pandemic are still stacking up. With the US government deficit at a peace time high, the spending must be financed by new government bond issuance.

As fixed income investors look ahead, there are two key questions on their minds: who will purchase the heavy supply of US Treasuries issuance associated with the historically large US budget deficit. And if the supply and demand imbalances could result in higher bond yields and renewed volatility.

Before analysing the supply and demand in the Treasury market, we should first look at the savings and investments balance of the US. Structural forces driving savings and investment can help to explain, among other things, what happened in March when the Federal Reserve (Fed) had to purchase $1.5 trillion of bonds to stabilize the Treasury market.

US savings and investments balance

At a high level, an open economy can be split into the public, private and external sectors. When the savings and investments balance of a sector is negative, this means that the sector’s savings are not sufficient to finance investments and it has to borrow to fill the gap. Figure 1 shows the historical sectoral balances of the US economy.

Starting with the public sector, apart from a few years around the turn of the century, the US public sector has been a net borrower for a long time because of persistent budget deficit. Between 1997 and 2001 and again between 2004 and 2008, the US private sector was also a net borrower. The second period coincided with rapid growth in mortgage debt, culminating with the financial crisis.

To finance the budget deficit, the US government can either borrow from the private sector, or when the domestic savings are not sufficient, from abroad. Since domestic investments have usually exceeded domestic savings, the US has been running a persistent current account deficit, which peaked at 6% of GDP in 2007.


Read the full report

Important Information
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material, including the website, has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.