Demand For US Bonds Falling Sharply As Dollar Weakens

Demand for U.S. Treasury bonds in global financial markets fell since President Joe Biden took office in 2021 because of a weakening dollar and declining U.S. credit rating.

The U.S. Treasury note once symbolized America’s economic and political strength. But it fell in bond markets for 28 months straight from 2020 to 2022. The 24.7% decline in U.S. bond prices over that time was the worst stretch for government bonds since the Civil War.

After recovering briefly for a few months beginning last November, Treasurys started their downhill slide again over the past six months. Once-reliable bond buyers have slowed making new purchases — even as the U.S. borrows more to cover trillion-dollar budget deficits.

A memo from U.S. Treasury Department officials to Treasury Secretary Janet Yellen last month said, “Bank security portfolio assets have been declining since last year with bank holdings of Treasuries down $154 billion compared to one year ago.”

Goldman Sachs’ Jim Esposito — co-head of the Global Banking and Markets Division — said on the Goldman Sachs Exchanges podcast last week: “There’s just a lot less demand than there was even six months ago. You can buy a 6-month T-bill that’s yielding north of 5%. Why wouldn’t you buy that instead of a long bond that’s yielding 4¾?”

As a result, bond prices are the lowest since the U.S. housing market began to collapse in 2007. Long-term 30-year Treasury notes have been in a downturn longer than the 2008 financial crisis and the 2000 Dot-com bust. Once-routine bond auctions have failed to move new Treasurys, and investors’ bond portfolios have suffered.

Falling demand for Treasury bonds is a problem compounded by Washington’s looming budget shutdowns and declining credit rating. Moody’s Investors Services downgraded the U.S. government’s credit rating from “stable” to “negative” earlier this month.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the US’ fiscal deficits will remain very large, significantly weakening debt affordability,” Moody’s said in a statement.

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