The marginal buyer of US Treasuries (UST), including hedge funds in the basis trade, plays an important role in the 2024 market landscape. While the data show that overall leverage may be more muted in 2024 than in March 2020, the importance of the marginal buyer appears no less diminished and in some ways is even stronger than ever.
As marginal buyers have no obligation to stay in their trades and may unwind when conditions are unappealing, their behavior as a group can influence the direction of broader markets including government bonds, repo financing and even cash equities. An unwind could be the result of illiquid or wide spreads for UST, bank balance sheets that limit financing, or plumbing including access to infrastructure and central counterparties (CCPs).
The importance of the marginal buyer of UST has risen along with debt issuance: since 2019, the US Treasury has issued a net $3.3 trillion new amount of debt to the public. Government authorities count on the willingness of domestic and global investors to buy this paper to finance government spending, tax breaks and other priorities. But like any market driven by supply and demand, UST rates must be high enough with each new issuance to bring buyers to market, otherwise the government can’t pay its bills.
This report is a quantitative and narrative look at the behavior of the marginal buyer of UST in 2024 as compared to other buying groups, and a review of the government and regulatory conditions that may prompt a review of UST liquidity, which in turn would impact marginal buyer behavior. While a short-term unwind could produce UST liquidity benefits as occurred in 2020, this may also generate broader concerns about investor confidence and market volatility. For those wondering if a UK-style LDI crisis could occur in the US, we think the answer is yes.
This report should be read by any market participant in the US Treasury and UST repo financing space. It should help investors, dealers and service providers plan for successful risk management in 2024.
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