Wall Street bond dealers are predicting that U.S. notes and bonds will decline 27% next year. The new supply, worth $418 billion, would be the least amount since 2008.
As the budget deficit narrows, the U.S.’s funding needs are reduced, and the Treasury is now focusing on T-bills. Investors are now demanding a larger stock of short-term debt. The decline in long-term debt supply may hinder yields, which gives Janet Yellen, Fed Chair, yet another reason to believe that rates can be raised without derailing the economy.
Experts are predicting that longer-term yields will be much slower to move up in 2016 due to the treasury using bills for funding. Net issuance is projected to be $404 billion in 2016 (excluding bills), which is significantly lower than the $607 billion estimate for 2015.
According to J.P. Morgan Chase and Co. (JPM), bill supply will be boosted by $173 billion in 2016. This would mark the largest increase since 2008. In addition, the bank projects that Treasury sales of coupon-bearing securities will decline to $313 billion in 2016.
A decline in net issuance may help keep Treasury yields under control as the Fed raises rates for the first time in nearly a decade.