Impact of Treasury Issuances on the Yield Curve

In 2024, U.S. Treasury issuances are projected to exceed $28.9 trillion. This represents a 28% increase from 2023, and 38% higher than 2020. We decided to take this opportunity to provide a brief overview on Treasury issuances.

Introduction

The yield curve is a fundamental tool in financial markets, illustrating the relationship between interest rates and bonds of equal credit quality but varying maturity dates. It serves as an indicator of interest rate directions and economic activity. The shape of the yield curve is influenced by several factors, including monetary policy, market expectations, and Treasury issuances. This write-up focuses on the impact of Treasury issuances on the yield curve, especially on its long end, which comprises bonds with maturities of 10 years or more.

Treasury Issuances: Definition and Types

To grasp their impact on the yield curve, it's crucial to understand what Treasury issuances are and their types. The U.S. Department of the Treasury issues debt securities to finance government spending activities. Known as Treasuries, these securities are considered virtually risk-free, backed by the U.S. government's taxing power. There are four main types of Treasury securities:

1. Treasury Bills (T-Bills): Short-term securities with maturities of one year or less.
2. Treasury Notes (T-Notes): Medium-term securities with maturities ranging from two to 10 years.
3. Treasury Bonds (T-Bonds): Long-term securities with maturities of 20 or 30 years, paying semiannual interest.
4. Treasury Inflation-Protected Securities (TIPS): Securities that provide inflation protection with varying maturities.

The Long End of the Curve

The long end of the yield curve, or the back end, refers to longer-dated bonds with maturities of 10 years or more. Yields on these bonds are sensitive to inflation expectations, economic growth projections, and Treasury issuances.

Treasury Issuances and Yield Curve Shape

Treasury issuances can significantly impact the yield curve's shape, particularly at the long end. When the Treasury announces larger-than-expected borrowing estimates and increases in coupon issuance across maturities, it can lead to a rise in yields, especially at the long end of the curve. This increase in yields is due to higher term premia, which are influenced by supply and demand dynamics. The increased supply of Treasury securities can lead to higher term premia, the extra yield investors require for holding longer-term bonds over short-term bonds. This phenomenon was observed in August when sizable coupon issuance increases were announced, resulting in a sharp rise in Treasury yields for longer maturities.

Factors Amplifying Yield Curve Movements

While Treasury issuances are a fundamental factor affecting the yield curve, technical factors can also amplify these movements. Changes in the fraction of U.S. Treasury supply going to overseas holders, banks shortening duration, and households taking a large portion of UST issuance can all influence term premia and the yield curve.

Expectations for Yields

Looking ahead, the normalization in term premia and changes in neutral rate expectations could drive higher yields at the long end of the curve. Conversely, a material growth slowdown could lead to lower yields. The outlook for yields depends on the magnitude of supply effects and the importance of other factors, such as economic resilience and inflation expectations.

Conclusion

Treasury issuances play a crucial role in shaping the yield curve, particularly the long end. The issuance of Treasury securities, especially when larger than expected, can lead to an increase in yields due to higher term premia. While fundamental factors are the primary drivers of these changes, technical factors can also influence the yield curve's movements. Investors and policymakers must closely monitor Treasury issuance plans and market reactions to anticipate and understand the implications for the yield curve and the broader economy.