Treasury issuance will keep yields elevated, says Barclays

Even if the Fed starts rate cuts, long-term yields are likely to stay high.

A glut of Treasury issuance will outweigh any Federal Reserve policy pivot to keep long-term yields elevated and pressure global bonds, according to Barclays Plc.

“Long-term yields in the US are likely to remain high, even if the Fed cuts rates,” the bank’s strategists Jeffrey Meli and Ajay Rajadhyaksha wrote in a note. “Studies suggest that a one percentage-point increase in the projected deficit-GDP ratio pushes up the 10-year Treasury yield by 20 basis points.”

The benchmark 10-year Treasury yield jumped to a six-month high in April as resilient US economic data prompted traders to pare back on their expectations for Fed rate cuts this year. Concern over heavy debt supply has the potential to further hurt demand for US debt.

The changing composition of Treasury buyers could also affect pricing for the securities, according to Barclays. Foreign central banks used to be major buyers of Treasuries but their appetite has faded as reserves flat-lined over the past decade. The Fed is also looking to shrink its balance sheet, leaving mutual funds and hedge funds as purchasers, according to the note.

The US budget deficit is likely to remain wide irrespective of the outcome of the November elections, Barclays says. Moreover, higher US yields pose risks to other global bond markets as they tend to move in sync.

“One thing is indisputable: any tremor in US Treasuries is likely to be felt far and wide,” according to the note. “And with the amount of Treasuries increasingly on offer, those tremors are likely to become more frequent.”