Thursday, December 31, 2020

Will A Near $2 Trillion Treasury "Bond Demand Gap" Develop in 2021?

 The US Treasury Department is set to flood the market next year with a tsunami of long-term bonds.

The Treasury plans to issue trillions of dollars in new Treasury securities with maturities of greater than one year.

The big question is: Who is going to buy the securities?

J.P. Morgan calculates that even after the major planned 2021 Federal Reserve Treasury bond-buying, $1.8 in additional supply will remain.

This will mean a major "bond demand gap" at current interest rate levels.

“When we add the numbers up, we have a pretty big demand gap,” warns Jay Barry, managing director of the interest rate strategy team at JPMorgan.

Notes the Financial Times,  "with expectations for higher growth and inflation in 2021, strategists say the US may be forced to offer higher interest rates on these longer-dated securities to entice investors to purchase the debt."

"Offer higher interest rates" is probably the financial understatement going into 2021.

I not only expect a jump in interest rates of at least 100 basis points but I expect the Fed will enter the market to monetize some of the debt so that the interest rate spike really doesn't get out of hand.

Monetization will mean more price inflation.

Hug your gold coins.



  1. Robert,

    Is there potential for these higher rates to cause money supply to drop and set in motion the next downturn?

  2. You can hug your gold coins all you want. Until the market is unrigged - stocks and bitcoin will likely continue to outperform it.