Investors are rushing to purchase US debt as the Treasury Department floods the market with short-term bills.
More than $1 trillion in new T-bills have been purchased in the last three months as federal deficits have skyrocketed, and smaller investors are increasingly entering the market as rates soar past 5%.
So-called noncompetitive bidders, or those who don’t submit competitive bids and instead accept the yield given, purchased a record $2.898 billion worth of six-month bills at 5.29% at a weekly auction in mid-August.
This volume was five times greater than it was just before the Federal Reserve began its campaign of rate increases in March 2022, which increased borrowing rates.
According to Bloomberg, there is such a high demand for short-term US debt that primary dealers’ balance sheets, which act as middlemen in the bond market, have dropped from a record high of $116 billion in July to roughly $45 billion in August.
T-bills are in high demand because the Fed ceased buying Treasuries last year and has been reducing its balance sheet, leaving other market participants to fill the gap.
In fact, according to economists at the St. Louis Fed, the US debt binge may force the Fed to pause its quantitative tightening effort in order to prevent the financial system from destabilising.
A staggering $7.6 trillion of interest-bearing US public debt, or 31% of all existing government debt, will expire in the next year.