Back in April 2013, when looking at the dynamics of global treasury supply and demand (and just before the TBAC started complaining loudly about a wholesale shortage of quality collateral), we made the simple observation that between the (pre-tapering) Fed and the BOJ, there would be a massive $660 billion shortfall in supply as just under $1 trillion in TSY issuance between the US and Japan would have to be soaked up $1.7 trillion in demand just by the two central banks.
A year later, bonds yields continue to defy conventional explanation, with ongoing demand for “high quality paper” pushing yields well below where 100% of the consensus said they would be this time of the year, and in this cycle of the so-called recovery, because for the improving economy thesis to hold, the 10Y should have been well over 3% by now. It isn’t.
As a result, a cottage industry sprang up in which every semi-informed pundit and English major, voiced their opinion on what it was that was pushing yields lower, and why bids for Treasury paper refused to go away even as the S&P hit record high after record high.
And just like in April of last year, the simplest explanation is also the most accurate one. According to a revised calculation by JPM’s Nikolaos Panigirtzoglou, the reason why investors simply can’t get enough of Treasurys is about as simple as its gets: even with the Fed tapering its QE, which is expected to end in October, there is still much more demand than supply, $460 billion more! (And this doesn’t even include the ravenous appetite of “Belgium” and the wildcard that is the Japanese Pension Fund arriving later this year, bids blazing.) This compares to JPM’s October 2013 forecast that there would be $200 billion more supply than demand: a swing of more than $600 billion! One can see why everyone was flatfooted.
As Bloomberg summarizes, “Everybody was expecting supply to come down, but maybe it’s coming down sooner†than anticipated, said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “There’s a shift in sentiment from the beginning of the year when everyone expected rates to move higher.”
