The Structural demand for U.S debt strong against the backdrop of the recent bond market volatility. With the expectation of the market structure to evolve in the coming time , the financial regulators have taken effective measures to improve the overall treasury market resilience and overall efficiency.
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Structural demand for U.S debt strong after bond market volatility – Key Takeaways
- The bond yield continues to move high throughout October
- The structural demand for U.S debt strong with a strong impact of the growing supply on the new bond insurance and tighter Federal Reserve monetary policy particularly by the Federal government.
- The bond market offers notable opportunities to the investors to create a unique diversified fixed income ratio
Moody’s Statement to Structural Demand for U.S. Debt Strong After Bond Market Volatility
Moody said in a client note that “Going forward, as the Fed reduces its Treasury holdings, foreign central banks, pension funds, insurance companies, and households will be stabilizing factors in the market,” Moody lowered its outlook on the U.S credit rating from negative to stable with increased fiscal deficit and overall reduction in debt affordability.
As the political polarization in the country along with federal spending is one of the major concerns of the investors therefore the US government faced the lowest bond prices in 16 years in the mid of October. With the expectation that the Federal Reserve will keep the monetary policy tight, the treasury yields have escalated this year.
The U.S economy grew at an impressive rate of 5% in the third quarter of 2023 defying all the predictions of the recession. This growth is a result of higher wages, tight labor market and higher consumer spending . Moreover business restocked their inventories to meet the demand of the customers.
The residential investment rebounded after consecutive nine quarters of decline while the government spending picked up . However, at the same time business investment soared low for the first time as the spending on equipment declined. In addition Joe Biden’s semi conductor manufacturing initiative also faded.
U.S economy showing signs of resilience
The strong economic performance in the summer which is unlikely to continue , the economy has shown resilience with hike in the interest rates by the Federal reserve . The growth is likely to slow down in the fourth quarter with the main reason including the United Auto Workers strikes , resumption of Student loan repayment along with delayed impact of high interest rates.
The report also showed that the inflation is moderated significantly in the last quarter, Most of the well known economists have forecasted and believe that Federal reserve can achieve a soft landing for the economy . Brian Bethune , the economics professor at the Boston college stated that “ We’ve seen for a period of time now a post pandemic induced negative bias about an imminent recession and persistent inflation,” “But not only is the economy surprisingly resilient, we also got productivity-driven growth for two consecutive quarters in 2023, meaning the business cycle still looks very solid.”
The growth in the consumer spending which accounts two third of the US economic activity accelerated to 4% with addition of 2.69 % to the GDP . The growth in GDP is a result of spending on goods and services. Although the wage growth has slowed but its rising faster than the inflation with increased purchasing power of the households.
The increase in wages was partially offset by the rise in personal taxes as taxes fall at 1 percent pace. Also the saving rate dropped to 3.8% from 5.2% in the second quarter. Moreover the decline in the saving and the resumption of the student loan payment have an overall impact on the spending .
People who have low income are making use of the loans to make purchases and eventually this is leading to more credit card delinquencies and low credit score. The extra saving that people have from the COVID times are gone and most of the economist think that the economy is headed for a slow down.
Reasons for increased Structural demand for U.S debt
Here are multiple reasons that contributed for the rise in structural demand for U.S debt strong but the important ones are the following :
- Tax cuts
- Stimulus programs
- Increased government spending let to large fiscal deficit
- Decreased tax revenue
