To The Moon

$iShares 20+ Year Treasury Bond ETF(TLT)$ $iShares 0-3 Month Treasury Bond ETF(SGOV)$ US Bond has been incredibly volatile the past 5 weeks. Signs of unrest in the debt market ? US 10-year bond yield has risen by 230bps since the beginning of last year, a sizeable increase by historical standards. Lately, the increase has also been accompanied by considerable volatility. Just in the last five weeks, yields have risen and fallen by nearly 50bps in each direction. Signs of worrisome unrest in the world’s largest debt market?

The first and second reason for rates volatility are inter-related. US Federal Reserve’s policy rate hikes and quantitative tightening programs have, over the past year and a half, caused monetary conditions to tighten, pushing up the entire yield curve. As the policy cycle matures and markets begin to price in, first an end of rate hikes, and then eventual rate cuts, some volatility in rates should be expected.

There is also the matter of bond supply/demand. US Fed is cutting its holding of treasuries, while the treasury’s issuances are ballooning to finance a 15% jump in government debt/GDP ratio since 2020. 
But even as the Fed has been reducing its holdings, the demand side has not faced any meaningful shortfall.

In fact, the key support for US treasuries is coming from the private sector. Both US and non-US private sectors’ holding of progressively higher yielding US treasuries have gone up considerably over the past year.

Why is the private sector so keen? The answer is simple—attractive nominal and real yields. At 5.5% at the short-end and 4.5%+ at the long-end, US treasuries and the USD are attractive worldwide. Easing inflation has also boosted the real yield from the treasuries. The US public debt has no shortage of takers.