Report sees pullback from central banks, ETFs and mutuals funds
There’s a problem brewing in the bond market with a net increase in US Treasuries issuance in 2018 while the big 5 central banks will scale back their purchases.
That’s according to a new report from Vincent Deluard, head of global macro strategy at Fortune 500 company INTL FCStone.
He says that net issuance of Treasuries will rise due to higher deficits and more maturing debt. He calculates that the US Treasury will need to roll over securities worth $3.5 trillion next year, up from $3.4 trillion in 2017 and that the US will be the only developed country where maturing debt will consume more liquidity year-over-year.
Meanwhile, demand will slide with the big 5 central banks – Swiss National, Bank of England, European Central Bank, Bank of Japan and the Fed – cutting their net purchase by $825 billion.
This, Deluard says, is because quantitative easing peaked in 2016.
While there is no guarantee on how the US budget will look for 2018, Deluard is expecting a rise in the deficit, highlighting that the Congressional Budget Office was basing forecasts on a repeal of Obamacare and certain other Trump policies. And then there’s the tax reforms.
“I do think that a tax cut is coming: it may not be as large as what the President promised, but Republicans cannot walk in the next midterm elections without any significant achievement. Since all Republicans agree that taxes need to be cut, while they cannot agree on which expenses should be axed, the most likely outcome is for the deficit to soar next year,” says Deluard.
With central banks pulling back on buying US debt, Deluard also predicts that the huge rise in investment by ETFs and mutual funds will begin to slide.
While those investors have put more into bonds than equities over the past decade ($1 billion a day since January 2016), Deluard says that the “reality of underwhelming funds” which stem the wall of cash.
That’s according to a new report from Vincent Deluard, head of global macro strategy at Fortune 500 company INTL FCStone.
He says that net issuance of Treasuries will rise due to higher deficits and more maturing debt. He calculates that the US Treasury will need to roll over securities worth $3.5 trillion next year, up from $3.4 trillion in 2017 and that the US will be the only developed country where maturing debt will consume more liquidity year-over-year.
Meanwhile, demand will slide with the big 5 central banks – Swiss National, Bank of England, European Central Bank, Bank of Japan and the Fed – cutting their net purchase by $825 billion.
This, Deluard says, is because quantitative easing peaked in 2016.
While there is no guarantee on how the US budget will look for 2018, Deluard is expecting a rise in the deficit, highlighting that the Congressional Budget Office was basing forecasts on a repeal of Obamacare and certain other Trump policies. And then there’s the tax reforms.
“I do think that a tax cut is coming: it may not be as large as what the President promised, but Republicans cannot walk in the next midterm elections without any significant achievement. Since all Republicans agree that taxes need to be cut, while they cannot agree on which expenses should be axed, the most likely outcome is for the deficit to soar next year,” says Deluard.
With central banks pulling back on buying US debt, Deluard also predicts that the huge rise in investment by ETFs and mutual funds will begin to slide.
While those investors have put more into bonds than equities over the past decade ($1 billion a day since January 2016), Deluard says that the “reality of underwhelming funds” which stem the wall of cash.
