Barclays: US Debt Market's Growing Reliance on Price-Sensitive Buyers Poised to Keep Yields Elevated

Barclays highlights that the composition of US Treasury buyers is shifting towards value-focused mutual funds, households, and other private investors, a change that has helped push 30-year Treasury yields to multi-decade highs.

Strategists Demi Hu and Anshul Pradan wrote in a report that as long as inflation persists, these buyers will demand increasingly higher compensation to hold long-term bonds. They stated, "The buyer base for US Treasuries has shifted." Since the Federal Reserve began reducing its holdings in 2022, demand from official sectors like foreign central banks and the Fed has steadily weakened, making "private investors the marginal buyers absorbing new supply."

They estimate that private investors now hold 73% of the US Treasury market, up from roughly 50% about a decade ago. Barclays' composite elasticity index, weighted by holdings, shows that "over the past 10 years, the US Treasury market's dependence on price-sensitive investors has significantly increased."

Data indicates that since the 30-year Treasury yield rose above 5% earlier this year, it has spent 41 trading days above that level as of Tuesday, the longest stretch since 2007, when it exceeded 5% for 50 trading days. Long-term yields have been climbing as the Federal Reserve's measure of long-term inflation has remained above target for the past five years, and US fiscal deficits have widened since the 2020 pandemic.

Investors are therefore demanding higher compensation, known as a higher "term premium," to hold long-term US government debt. Hu and Pradan noted, "As long-term Treasury yields hit multi-decade highs, investors are increasingly focused on fiscal deficits, duration supply, and inflation risk premiums as drivers of rising long-term rates."

The strategists said that as mutual funds, foreign private investors, banks, and households account for a larger share of Treasury buyers, the market will need to offer a "structurally higher term premium." They added, "Unlike official buyers driven by policy objectives, private investors are generally more sensitive to expected returns when making asset allocation decisions."