EC The Looming Shortage In Government Bonds


The Fed increased its balance sheet dramatically from about $800 billion to over $2.4 trillion under three QE programs. Although the Fed no longer actively purchases government bonds, it appears in no hurry to release those bonds into the marketplace, instead allowing the bonds to mature fully over time.   

Over 40 percent of outstanding US Treasuries are held by foreign central banks, sovereign wealth funds and other institutions. China and Japan together account for about 12 percent. As the US runs current account deficits with its major trading partners, the excess in US dollars are recycled into purchases of US Treasuries. More importantly, many central banks, especially, those in emerging countries, have purchased Treasuries in increasing amounts and are holding them to shore up their balance sheets and to provide needed foreign exchange reserves. In sum, Treasuries are being soaked up by US domestic and foreign entities as part of a worldwide push to strengthen balances in the private and public sectors in the wake of the 2008 financial crisis. 

The ECB and the BoJ both continue with very aggressive bond purchasing programs. The BoE may be forced to expand its current program in response to the fallout from  UK voters opting to leave the EU. The ECB came late to the game of bond purchases, starting in 2015, some six years after the US first implemented QE. Initially, the ECB embarked on a program of purchasing government debt at a rate of 50 billion euros per month. But as the supply of qualified government debt diminished the ECB increased its bond purchasing program to included corporates. Overall, the ECB program now soaks up about 80 billion euros a month of high quality debt . Speculation is ripe that the ECB will do more bond purchasing in the wake of the Brexit vote. Turning to Japan, the BoJ has long been a huge purchaser of domestic government bonds (JGBs). Over the next four years, the BoJ is expected to own over 60 percent of all outstanding JGBs, the highest of any country.

Growing Domestic Needs for Treasuries

Domestically, major holders of Treasuries include Federal government and state / local  pension plans (Table 1). These plans will require additional risk-free Treasuries to meet longer term obligations. US chartered banks have significantly increased their holdings of Treasuries and Agency debt as a means of strengthening their balance sheets. From 2013 to the present, commercial banks increased holdings of Treasuries by 30 percent .Finally, private pension funds and the life insurance companies hold approximately 6 percent of their assets in Treasuries. Industry analysts argue that proportion is inadequate to meet future liabilities and it is expected that these institutions need to double their holdings to satisfy future income requirements. In short, government bonds will be a strong asset class from here on out as these institutions re-balance their portfolios to meet long run requirements. 

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Doug Wakefield 4 years ago Contributor's comment

In March 2015, the JP Morgan annual stockholder report discussed the shrinking of Treasuries in ciruclation since 2007 even though the supply worldwide had expanded greatly. The evidence supported what you are talking about here. Central banks, sovereign wealth funds, etc, had been buying up US Treasuries and other Tier one assets (Basel III), while the supply at the dealer level had been shrinking dramatically. Your article only reinforces what I told my readers last year, and makes perfect sense. This is going to produce a huge shock to those holding heavy stock allocation with the mindset that higher stock prices mean MORE liquid assets, when development in US Treasuries since 2007 makes it clear this is not the case. Excellent article.

Gary Anderson 4 years ago Contributor's comment

Thank you for confirming what few believe, but is most likely true. And shortages could increase if policy is established to weaken price and boost yields. It is a diabolical bond first world we live in. Bonds as collateral are going to be in increasingly short supply if we are to believe people who are in a position to know.