In the wake of the COVID-19 crisis, the U.S. Treasury has issued the largest stimulus package in the country’s history. To try keep pace with costs, the agency issued a record $2.2 trillion in 10-Year Treasury notes.
Previously, those notes were purchased largely by foreign investors. Widely considered an excellent hedge, ‘Treasuries’ generally sell quickly.
However, as the certainty of the investment has dwindled, foreign investors have moved out of the market. In their place, U.S. money-market funds have purchased the vast majority of new issuance.
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These funds generally hold the assets of retirees and business pensions. For example, Fidelity Investments currently holds a stunning $3.3 trillion in such assets. All told, U.S. money-market funds hold a total of $4.7 trillion in government bonds.
Without money-market funds, the exploding debt issuance would likely be without buyers. According to Northern Trust Asset Management analyst Peter Yi:
“If the U.S. money-fund industry wasn’t so large, there’d be some possibility that the market wouldn’t be able to absorb all the new Treasury issuance that we’ve seen in such a short period.”
Assuming these funds continue purchasing, the brunt of the risk associated with the current stimulus initiatives would fall on retirees. Funds that hold such dramatic levels of bonds, while seemingly low risk, could lose substantial value, should yield curves invert.
Ironically, when bond yields retrace, the Federal Reserve (Fed) has been known to step in. The agency has already pledged to purchase $2.5 trillion of Treasury debt before year’s end. Some analysts believe this is the tipping point, as the government buys its own debt.
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