from Follow the Money

Limiting the supply of the ten-year Treasury note

February 2, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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I have discussed at length the support for the Treasury market provided by foreign central banks.

But that is only part of the story.

I have also alluded to the role played by Treasury’s debt management policies.

This is what I mean.

At the end of 2001, ten year Treasury notes and even longer term Treasury bonds accounted for 40% of the total stock of marketable Treasuries, or $1168 billion of the $2915 billion stock (The relevant data can be found here, and here). At the end of fiscal 2004, the ten-year note and the remaining stock of even longer-term bonds constituted only 31% of the outstanding stock, or $1203 billion of the $3845 billion total.

In other words, the overall stock of Treasuries increased by $931 billion, and the stock of longer term Treasuries (ten years and up) increased by only $35 billion. If the percentage of longer-term Treasuries in the overall debt stock had stayed constant at the 2001 level, the current stock of longer-term treasuries in the market would be closer to $1540 billion than to $1200 billion ...

Increased issuance of inflation-indexed bonds (TIPS) is not the main explanation for the reduction in the supply of longer-term bonds. TIPS increased from 4.6% to 5.7% of the total stock over this period, while the stock of bills and 2-3 year notes rose from a bit over 38% of the stock to a bit over 49% ...

If even a small fraction of the $700 billion in foreign purchases of Treasuries since the end of 2001 (using data through September 2004) went into the ten year note or the long-bond, the stock of long-term Treasuries in American hands has gone down -- even though the overall stock of Treasury notes is way up. Given the overall surge the stock of marketable fixed income debt, there is no doubt that the stock of longer term Treasuries has fallen relative to the overall market for longer term fixed income assets.

Squeeze supply. Bank on intervention by foreign central banks to provide a steady source of demand for Treasuries of all maturities. The result: unusually low benchmark ten year rates? And perhaps even different signals from the bond and equity markets?

Of course, if W gets Congressional support for his plans to privatize Social Security, he will need to issue a lot more Treasuries of all maturities. If up to four percentage points of payroll (about 1/3 of all Social Security revenue) can be diverted into private accounts once the reform is fully phased in and no one over 55 will see their benefits cut, I suspect the cash flows of the "reform" will be much worse than Social Security Commission’s plan two. The consolidated deficit will go way up, as will the stock of outstanding US Treasuries. However, it now seems the plan won’t kick in until FY 2009 -- that is one way to try to avoid scaring the bond market.

W gets the glory; the next guy has to figure out how to pay for it ...

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