Normally when a company sells a lot of bonds to finance questionable spending bond buyers react negatively, sending the bond price lower and the yield higher. The idea is that the bond buyers want more compensation or yield from the borrower who appears to be spending like a drunken sailor.
But the U.S. government is different. While there’s no question our elected officials are trying to spend us into oblivion, there’s another force at work that is trying to keep interest rates on Treasury bonds in check… the Fed.
The central bank has an unlimited bank account called a printing press, and appears ready to use it to buy long-maturity Treasury bonds so as to keep interest rates low. This helps the U.S. government sell and refinance bonds at low rates, which makes the exploding debt easier to service.
In March, the U.S. Congress passed the $2.3 trillion CARES Act and the Fed ramped up its Treasury buying. Its purchases have been concentrated on the shorter end of the yield curve, with maturities in the 10-year and longer range accounting for only 22% of the Fed’s Treasury holdings as of last week. This is expected to change so that we don’t end up with a mismatch between supply (what the U.S. government sells) and demand (what investors buy). Too much supply could disrupt the market, so the Fed will make up for any soft demand.
TD Securities analysts expect more Fed buying in the 20- to 30-year maturity range.
While the rest of us can’t borrow unlimited amounts, the actions by the Fed do affect our finances. We can get a mortgage near 3%, which would have been laughable just a few years ago, and we won’t earn much on fixed income or savings accounts.