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Normalization

Over the next 12 months, $8.2Tn of government debt will mature, and therefore will have to be renewed. In addition to that, because of the budget deficit, the total amount of gross debt issuance will be above $10Tn. That is almost one third of all the government outstanding debt. There is a big portion of that debt that has been funded with short term bills (less than a year), but the Treasury announced a program to extend the maturity of debt and use long bonds to fund the government. That will put pressure on the long end at a time where China and Japan are not buying as much debt as they used to, and banks are trapped with the bonds they bought during #zirp. It may put pressure on the short term bucket too, since there is a lot of demand for short term paper from money market funds. This dynamic tells us that the yield curve should steepen (more demand that supply in short term, and more supply than demand on the long end) from the techinical perspective. Add #ratecuts to the mix and we should see a normalized yield curve pretty soon.


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