The Simple Reason Treasury Yields Are Going Lower: Half A Trillion More Demand Than Supply

Tyler Durden's picture

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."

Here is JPM's math:

QE-driven demand looks set to decline as the Fed tapers. Assuming Fed tapering is completed by October, and no change in BoJ policy, bond purchases by G4 central banks should decline by $500bn vs. 2013 to around $1,080bn this year. All these components of bond demand are shown in Figure 1. The 2014 bar encompasses the projections explained above. In total, bond demand is expected to stay flat vs. last year as an improvement in private sector demand offsets Fed tapering.



How does this compare with bond supply? After peaking in 2010, government bond supply is on a declining trend due to declining government budget deficits.  Spread product supply is also declining driven by European credit supply, which is contracting in both the Corporate and Agency bond space, and securitized products in the US (ABS and non-Agency MBS), which are also contracting. In these supply estimates we only included external rather than EM local debt, as the latter tends to be dominated by local EM investors. We still expect bond supply to decline by $600bn in 2014 to $1.8tr. The balance between supply and demand, i.e. excess supply, looks set to  narrow from +$200bn in 2013 to -$460bn in 2014, a swing of more than $600bn (Figure 4).


Our estimates for bond supply and demand are in notional amounts rather than market values, so a gap between the two is a meaningful concept and should close via market movements. Indeed, the correlation between the estimated gap in Figure 4 and bond yield changes is 0.56, which is significant. Mechanically, the decline in the excess bond supply in 2014 vs. 2013 would imply that the yield of the Global Agg bond index should fall this year by around 40bp by simply looking at what happened before in years with similar excess bond demand to the one projected for this year, i.e. in 2008, 2011 and 2012.

The simple conclusion:

The Global Agg bond index yield has fallen by 30bp so far this year, so most of the projected decline has happened already.

Well, yeah... assuming JPM's massively downward revised estimate of global bond supply is accurate. What happens if instead of $460 billion in excess demand there is $1 trillion, or more? What is the equilibrium rate then?

And there you have it: no crazy de-unrotations, no short squeezes, no unicorn magic voodoo: simple supply and demand.

Furthermore, while we await the demographic hit to arrive sometime in 2017 which will once again send US Treasury issuance soaring as a result of a need to fund budget deficits from a welfare state caring for an aging population, the biggest wildcard until then is just what the US current account will do in the coming years.  Curiously, that also happens to be Bank of America's chart of the day:

The savings gap: The US current account balance, at -1.9% of GDP, is often seen as the trade shortfall. But by definition, it is the gap between savings and investment. Simply put, if we are not saving enough to finance investment, we will need to borrow capital from abroad to fund that gap. The result: a capital account surplus or an offsetting current account deficit. With savings undershooting investment for roughly the past thirty years, the current account has been in negative territory and foreign capital inflows (netted against US outbound capital flows) have bridged that shortfall.

What is ironic here, is that if JPM is accurate in its supply/demand calculation, one of the main reasons why bond yields are tumbling has everything to do with the decling in the US trade, and thus, current account deficit. Because if the US needed more external funding, then it would be able to issue more debt, which would then result in greater supply, and higher prevailing yields. In the meantime, however, since the US government's funding needs, at least for the next 3 years that is, are lower than at any point since Lehman, one can argue that, at least based on declining supply of Treasurys (and US funding needs), the prevailing yield will drift ever lower, making life for the spinmasters (those whose livelihood depends on convincing mom and pop that sliding bond yields is not indicative of a slowing economy) a living hell for the foreseeable future.

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PlusTic's picture

yo dude, yields have been up for the last 9 days in a row...

Vampyroteuthis infernalis's picture

This raises the question. Why is the supply dropping when the economy is slowing down? Tax revenue has to be going over the cliff. And no, austerity is not that much in spending cutback.

nope-1004's picture

Charts released by insolvent banks, members of the private Federal Reserve, recipients of citizen tax dollars through TARP and QE.  Simple "supply and demand" is publicly palatable, because we wouldn't want someone, somewhere, to question how the Foodstamp ponzi is sustaining itself during the depression.

100% smoke & mirrors

ZerOhead's picture

This is great news!

I was beginning o worry all the treasury purchases were only coming from proxies for the Fed or high net worth individuals who do not want to participate in upcoming bank bail-ins...

Hal n back's picture

a) it's a trade to get appreciation on bond values and B) its money leaving the stock market and c) its printed money afraid of where to put it. anyplace but gold.


watch the deficit, QE was the Fed as last resort buyer.

We stilll have growing deficits which is an issue, as is growing debt outstanding. Two separate big problems.


Not  so much the Fed as last resort as americans buy treasuries, for now. At least we know they can print money to pay them off, and yes, at some point the US credit worthiness comes into play. When, who knows.

There is also the hope that US rates go negative soon and we see a pop on that--the recent pop on treasury prices came from the Euro set up for negative rates. They could not get banks to loan at .1%, and neither can the US (except for stock buybacks).


a real messed up system about to crash one way or another.






Money_for_Nothing's picture

The answer is rehypothecation. More bonds are needed to borrow more money. A replacement for the negative velocity-of-money.

TeethVillage88s's picture

Which Begs the Question: Which charts & Graphs are useless if we have unlimited Rehypothication going on both here in NYC & in London UK.

A) Who is watching the Watchers
B) Do we have a Standardized Accounting System
C) Do we have a Standardized Auditing System
D) Do we have a Standardized Financial Rating System
E) Are our Government Statistics Really Measuring what we thing they are measuring
F) Is Big Money Influencing these Government Systems & the Fed & Statistics & Ratings Agencies & Independent Accounting Firms & Congress & Laws & Regulators & Tax Systems

slightlyskeptical's picture

Tax revenue is very dependent on capital gains. I would expect collections in 2014 and 2015 will be well above projected. This of course means that the deficits will be smaller. Remember the Clinton's surplus? It was all cap gains. Once the markets tanked those excess taxes all went bye-bye and were replaced with multi year losses which offset incomes.

Taxes, pensions, trickle down(lol) are all dependent on a rising stock market. Things get real bad all the way around when the market gets bad. The market avaerages control the economy to a large degree rather than simply being a reflection of the economy.

Stoploss's picture

Hey dude, the 200 year trend is DOWN................................................................

Dr. Engali's picture

That's to be expected after the recent rally. The long term trend is lower yields. Think Japan.

TeethVillage88s's picture

Why doesn't a chart show international investment OR are you trying to combined Investment? ($3.16 Foreign Investment USA) ($2.69 Private Domestic Investment)

TeethVillage88s's picture

So the Chart shows 2005 Was a great year for Investment, but not as good as 1999.

So Manufacturing Dropped in 1979, but Investment Dropped in 1999.

Must be all Real Estate & Financial Assets/Equities.

Manufacturing: (12 Million down from 19.5 Million) All Employees: Manufacturing

Aaaarghh's picture

bollocks to it all

yogibear's picture

LOL, The Central banks are buying each other's debt with infinite printed money. No productivity here.

maskone909's picture
The Simple Reason Treasury Yields Are Going Lower: Half A Trillion More Demand Than Supply


supply and demand is a language spoken in markets pre 2007.

china has consumed more gold annualy in the last 5 years than total output from miners.  yet, the price continues to move down!!! 


you can catch more episodes of chris angle's, Mind Freak tuesdays on A&E

youngman's picture

Why buy something when you are going to lose money if you hold it to maturity????  Confusing to me..only Central Bankers can make that play and win..

CrashisOptimistic's picture

Why do you presume it is held to maturity?  These people are 75 yrs old.  Holding 30 year bonds to maturity is not even considered in the purchase.

Oil is sniffing $105.  This can't be good for GDP.  Weak growth drives yields down.

Japan got there first.  We're just following their footsteps.


zaphod42's picture

"Weak growth drives yields down."

Yields down -> Prices up.  Only way to continue this is to force lower yields / negative yields.

Nirvana is at hand.


Seasmoke's picture

So why does Pimco continue to flounder ?

Dr. Engali's picture

Because the crazy guy at the helm got kicked out of the club after he bit the hand that fed him.

NoDebt's picture

"The era of austerity is over"  -BHO

Don't worry, they'll make more bonds.  LOTS more.  Obamacare will begin helping tremendously in that respect starting next year, maybe even the last quarter of this year.

Soul Glow's picture

Make more?  Like Detroit used to make cars?  Will this making of bonds increase employment?

NoDebt's picture

I just checked with Paul Krugman.  He says yes.  Very stimulative for the economy.

SDShack's picture

MyRA, it's what's for dinner...

Itchy and Scratchy's picture

Tax payer fully invested! That should work out just fine!

kchrisc's picture

"The Simple Reason Treasury Yields Are Going Lower"

Belgium is buying.

What did I win?!

Soul Glow's picture

Rather, someone is buying through Belgium; Belgium is a proxy just as London was a proxy before them.

Dr. Engali's picture

If there is that much real demand for treasuries at this yield then that is a clear sign that Washington needs to spend moar and get this economy going. Let's see which country of brown people can we liberate from the heavy burden of their gold and oil?

Soul Glow's picture

Syria!  We must liberate Syria!

Bear's picture

Damn! I thought Mr. Obama said we already did that.

RaceToTheBottom's picture

Iraq needs a redo, too.  We need to make sure they don't do a 911 again....

kito's picture

doc so far we have all been proven very wrong. we have been screaming about how they could never put the brakes on qe. we were wrong. we then screamed how taper is impossible, how nobody wants u.s. paper, that the fed is propping up flow....and again, wrong. and yet, the federal govt has cut quite a bit off of the annual deficit, rather than borrowing more....and still the show goes on.......perhaps doc, we all overdosed on the red pill........

Panafrican Funktron Robot's picture


What evidence do you have that QE stopped?

Monetary base has increased $814 bln since the taper was announced (May 2013 - April 2014).

For comparison, the monetary base increased $395 bln for the period May 2012 - April 2013.

That looks to me like a massive increase in the money supply since this supposed taper began.  How does that square with the media message?

fonzannoon's picture

whether QE has stopped, is stopping, or won't ever stop is up for debate. Regardless, the dollar has not collapsed. Yields have fallen into a centrally planned sweet spot. Stawks just climb gently higher with zero volatility other than the occasional momo slaughter when they get carried away. PM's are caught firmly in a headlock.  

No one on here outside of robotrader and milliondollarbonus thought this possible. It's fascinatingly maddening.

SDShack's picture

No, this is all just repeating the Pump & Dump, Rinse & Repeat pattern. The cycle aligns almost perfectly every 7 years. 1987.... 1994.... 2001.... 2008.... 2015 Q1 is my prediction. "Taper" will continue and the Fed will just be back to about "normal" by Q4 2014 and the S&P will still be around all time highs. Then the final 0zer0care attack against Employer HC will begin, and this will crater the Holiday Season. Retail will implode at year end. The Repukes will gain the Senate, the Red Vs Blue WWF Smackdown will reach fever pitch (budget, debt ceiling, etc), and stocks will crash in early 2015 so the Fed will have to re-start QE again. This is all so predictable, because it has happened over and over and over. The next time will be no different. The problem is that with each intervention leg, the real economy becomes more and more corrupted to Fed manipulation and Govt. Intervention. The Ponzi is purposely being engineered to become Perpetual. It's exactly why the world CB's are buying each others' debt. It's just a debt shell game. Plan accordingly.

Frilton Miedman's picture




Since 1980 it seems this Fed cycle is reactionary to constant fiscal failure, horrific trade policy & political campaign bucks prioritizing the highest bidder over the people.

As household debt increases, the Fed reacts to cheapen that debt, which of course equates to allowing more debt to the benefit of Fed members.

The U.S. is due for a MAJOR overhaul of laws on bribery and conflicts of interest.


lasvegaspersona's picture


We arrived here by seeing that the debt of the USA could never be repayed and that eventually the rest of the world would get tired of carrying us. That has not changed. What we are seeing now is the contrarian crowd exhausted, befuddled and simply amazed that things have gone on so long. We have reached peak exhaustion. It is a sign of a top I think.

I too amazed by how long things can stretch out, but I don't think the problem is red pill overdose.

Itchy and Scratchy's picture

There's rarely enough supply of anything at tops of markets!

Soul Glow's picture

Dow Jones 20k!!!

[Honk, homk, rattle, rattle]

buzzsaw99's picture

rates cannot rise, period.

“Once you eliminate the impossible, whatever remains, no matter how improbable, must be the truth.” [/Sherlock Holmes]

slightlyskeptical's picture

I hate that quote.

After the impossible there are usually many numerous possibilities, so eliminating the impossible does not bring you much closer to the truth at all. It only eliminates what we all knew in the first place in that the impossible is impossible.

Jayda1850's picture

This will be used as the perfect excuse by the Fed, when the next crisis hits, to use more unorthodox policies and purchases to take over all other markets in the name of stimulating the economy. Our actions are starting to cause blowback and distortion in the treasury market due to lack of supply(which I'm sure this POS govt can easily remedy), so fuck it, we'll have to stimulate other markets by buying index funds, student loans, and any  other junk paper. We're not even close to seeing these people go full retard. Look at Japan for Chrissake!

Madcow's picture

here's the 30-minute explanation by Chris Martensen -

Kreditanstalt's picture

Where's all the "money", desperately seeking bonds, coming from?  No one asked that...

buzzsaw99's picture

borrow yen at 0.5%, buy the usa 10Y at 2.6%. easy money.

MassDecep's picture

Belgium, ya know, that really rich country in Europe...

LawsofPhysics's picture

"Taper" you say?  Show me the balance sheet motherfuckers, show me the taper...