Goldman Sachs Projects Supply-Side Upward Pressure on Rates

Genevieve Signoret & Delia Paredes

(Hay una versión en español de este artículo aquí.)

A few months back, we showed you how Treasury debt issuance has surged, in part to help pay for Covid-era massive stimulus. Ane we explained how this puts upward pressure on long-term rates, in turn hurting home affordability and creating refinancing challenges for commercial real estate.

Per Financial Times ($), we now know Goldman Sachs is forecasting that, although the Treasury will issue less debt this year than the $2.4 trillion it borrowed last year, it expects a far lower proportion of total debt issuance to be in T Bills than last year, and a far higher proportion to be in notes and bonds [1]. If so, this change in the maturity profile of newly issued debt can push up on rates across the yield curve, including on the long end.

Goldman Sachs does, however, point to a mitigating factor. Like us, it projects that this year the Fed will start to taper QT—reinvest some of the cashflow earned as existing bonds in its portfolio mature in in newly issued bonds. This gradual renewal of Fed demand for bonds will offset some of the upward pressure on rates coming from the supply side. But do note our word choice: Gradual. Some.

These facts and projections along with Fed reluctance to cut rates help explain why the yield on the 10-year Treasury bond remains above 4% even though most market participants expect an economic slowdown, continued disinflation, and an end to Fed rate cuts.

[1] Notes and bonds mature in 2–30 years, whereas T Bills mature in less than a year. T Bills pay yield in the form of a discount, the difference between their purchase price and the par value at which they’re redeemed. Notes and bonds, by contrast, pay coupon rates.