Weak Demand and Market Volatility
The recent messaging regarding weak demand in the market has raised concerns among investors. This is reflected in the ‘term premium,’ which measures the additional yield investors require to hold a 10-year Treasury, a long-term debt. Surprisingly, this value turned positive for the first time since June 2021 towards the end of last month.
The term premium is a form of compensation that investors demand for the risks associated with holding onto a long-term bond rather than opting for short-term debt. These risks include potential changes in monetary policy or unexpected inflation that could impact the value of a long-term bond.
It seems that investors are becoming more cautious and reducing their purchases due to escalating market volatility and uncertainties surrounding the Federal Reserve’s actions.
Adding to this unease is the fact that the United States is facing a high deficit. According to the Congressional Budget Office’s estimation on Oct. 10, the federal budget deficit reached $1.7 trillion in fiscal year 2023, surpassing the $1.38 trillion recorded in the previous year.
Furthermore, the U.S. government has issued a substantial amount of Treasuries, totaling $15.73 trillion up until September, compared to $12.53 trillion during the same period last year. When the supply of Treasuries increases, it typically exerts downward pressure on prices and drives yields up.
Peter Tchir, the head of macro strategy at Academy Securities, points out that the current spending habits of the U.S. government raise concerns. He believes this loose approach to spending erodes faith in Washington, D.C.’s fiscal discipline. As a result, creditors become less inclined to lend and may demand higher premiums.
Unsurprisingly, this weak demand was met with market reactions as stocks fell on Thursday, putting an end to a four-day winning streak. Moreover, the yield on 10-year Treasury bonds rose by 4.7%, while the 30-year bonds saw a 4.8% increase.
In conclusion, the combination of weak demand, market volatility, and a high deficit is causing apprehension among investors. The market’s response to these factors has been observable, with stocks experiencing a downturn and yields on long-term Treasury bonds rising. It remains to be seen how these factors will affect future market trends.