Bank of America said in a report released on Wednesday that as interest rates climbed and the US deficit intensified, the issuance of US treasury bond bonds in 2024 might hit a record high.
Bank of America analysts raised their estimate of the supply of 10-year US treasury bond to about $1.34 trillion, $90 billion higher than the previous estimate.
"Higher interest rates may have a significant impact on deficit spending and lead to an increase in the issuance of US treasury bond bonds, resulting in a spiral effect," analysts wrote. Against the backdrop of rising financing costs, the outlook for (debt) supply has become more challenging
According to data released by the US government last Friday, the budget deficit for the fiscal year 2023 was $1.695 trillion, a 23% increase from the previous year, due to declining income, increased spending on social security and healthcare, and a record high interest cost on federal debt.
Given that the deficit of nearly $1.7 trillion in the 2023 fiscal year exceeded expectations, Bank of America has adjusted its deficit outlook for the next few years: from 2024 to 2026, the deficit will steadily climb from $1.8 trillion to $2 trillion.
Bank of America also predicts that the proportion of net interest expenses to GDP will continue to rise, reaching a record high of 3.5% by 2026.
Although solutions such as tax hikes and spending cuts have long been considered necessary to address the US deficit, analysts at Bank of America point out that implementing these plans is not easy for lawmakers.
More likely, the US Treasury Department will continue to issue treasury bond, further expanding the treasury bond market worth US $25.8 trillion.
Bank of America analysts predict that next week, there will be a sharp increase in the size of refinancing bond issuance in August. Except for 7-year and 20-year treasury bond, the auction size of all maturities of treasury bond will rise to historical highs.
The US Treasury has indicated that it is ready to expand the scale of treasury bond bond auction, and the latest auction plan will be announced on November 1. Josh Frost, Assistant Secretary of Financial Market of the US Treasury Department, said last month: "It may be necessary to further and gradually increase the scale of treasury bond bond auctions in the coming quarters."
The growing supply of treasury bond may continue to push up yields. The recent auction of treasury bond has shown signs of weakening demand, leading to yields hitting a 16 year high.
Some financial giants have raised alarms about the imbalance between supply and demand in the bond market, with Ray Dalio, the founder of Bridgewater Fund, and Bill Gross, the "old bond king", both warning that if the US Treasury wants to find bond buyers, it needs to increase yields.