Here’s why a Democratic clean sweep may not spell the end of the bond bull market

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Many investors have come to the view that a Democratic sweep in Washington would cleanse the bond bulls from the U.S. Treasurys market.

But one market participant says even if a Biden administration pushes ahead with an aggressive stimulus package next year, more spending won’t automatically lift government bond yields, mainly if the record budget deficits and deluge of new issuance aren’t large enough to overcome the huge well of savings by U.S. households and businesses.

“The tendency for private sector lending to offset public sector borrowing is very powerful in the U.S., and, in fact, it has been increasing for decades,” wrote Stuart Sparks, an analyst at Deustche Bank.

In other words, Sparks says deep-pocketed households and corporations have been more than able to absorb any new issuance put out by the U.S. Treasury Department.

See: Here’s why the prospect of a Democratic clean sweep in November’s elections is rattling a sleepy U.S. bond market

Sparks pointed out that even as net government borrowing had risen by 23% of the U.S.’s annual economic output in the first half of 2020, net saving by the private sector also had risen by 22.6% of GDP.

The accumulation of capital by the U.S. private sector is reflected by the growing share of U.S. Treasurys owned by domestic investors at the expense of overseas money managers and central banks.

Foreign holdings of Treasurys have increased by more than 4% in the 12 months through July 2020 to $7.09 trillion. Over the same stretch, U.S.-based holdings of the country’s bonds have jumped by 29% to $12.9 trillion, according to Treasury data.

In previous years, the assumption has been American households enjoyed a wealth of investment options and, therefore, were more sensitive to the changes in bond yields, making them less willing to accept lower income than foreign investors who had few other outlets to park their cash.

But the increased share of U.S. debt owned by Americans hasn’t pressured yields higher. In fact, yields have been falling over the past decade.

The 10-year Treasury note yield
was at 0.72% Wednesday, a week after the benchmark maturity threatened to push above the 0.80% mark amid growing worries that a Biden administration could spark a bond-market rout. Yields and bond prices move in the opposite direction.

“It’s true that savings have exceeded investment in the private sector for well over a decade,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle, in emailed comments.

But at the same time, the way American households had surpassed the importance of overseas investors wasn’t a useful gauge when assessing if the bond market was vulnerable to a sharp, painful selloff, he said.

While the significant heft of U.S. savings by businesses and households was a powerful case for why new issuance and supply wouldn’t pressure yields higher on their own, Al-Hussainy said that if the stimulus was successful in lifting growth expectations it would force investors to demand higher yields to compensate for the risk of inflation.

In addition, the sharp surge in household savings during the pandemic remains unsustainable, according to Tom Graff, head of fixed income at Brown Advisory.

Still, market participants agree that the Fed and major central banks bond-buying programs are likely to keep a lid on any steepening of the so-called yield curve, making it difficult to ascertain how far a selloff could eventually run.

Read: Americans are taking on more of the burden for funding record U.S. deficits

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