“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
AI Summary.The author argues that a surge in money growth beginning in 2020 put upward pressure on inflation to a degree unprecedented in the sample period since 1967, and that subsequent monetary tightening produced strong disinflationary pressures. Had policymakers tracked money growth using a price-target model, they might have tightened sooner and avoided some of the inflation.
Peter Ireland, Stephen Miran and Nouriel RoubiniHudson Bay Capital
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Ireland, Miran, and Roubini compare the actual price level to the predictions of an equilibrium model relating prices to money supply. Predicted inflation hit a 60-year high in 2020–21, months before inflation surged and then crashed once the Fed hiked.
Would tracking money growth have helped policymakers tighten sooner?
Core argument: The money growth surge beginning in 2020 and continuing into 2021 put upward pressure on inflation to a degree unprecedented in the post-1967 sample period, according to the graphs in Figure 3.
The graphs in Figure 3 show quite clearly how the surge in money growth starting in 2020 and continuing in 2021 put enormous upward pressure on inflation, to a degree unprecedented in the post-1967 sample period. And while the large and negative price gaps that followed in 2022 and 2023 are likewise indicative of strong disinflationary pressures applied through subsequent monetary tightening, one can’t see these graphs without asking: Had Federal Open Market Committee members been monitoring measures of money growth with the help of the P-star [price target based on monetary aggregates] model, might they have ended QE and raised interest rates sooner and more quickly, thereby avoiding at least some of the post-2020 inflation? Of course, massive fiscal expansion was another driver of the post-2020 surge in inflation, as suggested by fiscal theories of the price level. The model simply observes that regardless of its originating source, excessive money growth signals that inappropriate macroeconomic policies are fueling higher inflation. Fiscal expansions that expand money supply will be reflected in a P-star model.
Takeaways by Macro Roundup® AI
The money growth surge beginning in 2020 and continuing into 2021 put upward pressure on inflation to a degree unprecedented in the post-1967 sample period, according to the graphs in Figure 3.
The large negative price gaps of 2022 and 2023 indicate strong disinflationary pressures from subsequent monetary tightening, raising the question of whether FOMC members using the P-star model would have ended quantitative easing and raised interest rates sooner and more quickly.
Massive fiscal expansion was another driver of the post-2020 inflation surge, as suggested by fiscal theories of the price level, and fiscal expansions that expand the money supply are reflected in a P-star model.
Related Articles:
Money and Inflation— The M2 money supply has contracted for the first time in sixty years, shrinking at an annual rate of nearly 5%, yet inflation has remained high rather than turning to deflation. The author argues this undercuts the claim that money supply growth drives inflation, since the same logic implies severe deflation should now follow.
State Dependence of Monetary Policy During Global Supply Chain Disruptions— The authors present descriptive evidence that global supply chain disruptions were associated with elevated transportation costs, goods supply-demand imbalances, and a surge in goods prices, steepening the aggregate supply curve. In the disrupted state, a contractionary monetary policy shock produces muted responses in real output and spare capacity but a substantially stronger decline in goods prices.
What Next for r*? A Capital Market Equilibrium Perspective On The Natural Rate of Interest— A capital-market equilibrium model estimates that the steady-state safe natural rate of interest across advanced economies has fallen from about 5% to about 0%, driven by slower growth, demographics, higher mark-ups, and rising risk premia. The author estimates that artificial-intelligence-driven growth and heightened inflation risk could each raise it by about 1 percentage point.
AI Summary.Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
OECD StaffOrganisation for Economic Co-operation and Development
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Across the OECD last year, $13.5T of governmental debt needed refinancing, 70% ($9.5T) of which was US debt, up from 57% in 2020. The US and Japan were outliers in refinancing requirements relative to GDP.
How high has government borrowing across advanced economies risen?
Core argument: OECD central government gross borrowing rose 7% in 2025 to a record USD 17 trillion from about USD 16 trillion in 2024, and is projected to reach roughly USD 18 trillion in 2026.
The gross borrowing requirements of central governments in the OECD area continued the upward trajectory that began in 2023. This followed decreases in 2021 and 2022 after the large spike in issuance in 2020 at the onset of the COVID-19 pandemic. Borrowing increased by 7% in 2025, rising from around USD 16 trillion in 2024 to a record USD 17 trillion, and it is projected to reach around USD 18 trillion in 2026. As a share of GDP, gross borrowing decreased by almost 1 p.p. to 23% in 2025, but it is projected to rise again to 24% in 2026. Annual refinancing requirements reached a record high in nominal terms in 2025, but declined as a share of GDP. [Sustained output growth resulted in the debt stock as a share of GDP in the OECD area remaining stable at 83% in 2025]. A few large issuers account for the majority of refinancing requirements in the OECD area, with the United States and Japan representing close to 80% of the total (Figure 1.2, Panel B). However, while the share accounted for by Japan declined from 16% in 2020 to 7% in 2025, that of the United States increased from 57% to 70%.
Takeaways by Macro Roundup® AI
OECD central government gross borrowing rose 7% in 2025 to a record USD 17 trillion from about USD 16 trillion in 2024, and is projected to reach roughly USD 18 trillion in 2026.
Gross borrowing as a share of OECD GDP fell by almost 1 percentage point to 23% in 2025 and is projected to rise to 24% in 2026, while the debt stock remained stable at 83% of GDP amid sustained output growth.
The United States and Japan account for close to 80% of OECD refinancing requirements, with the US share rising from 57% in 2020 to 70% in 2025 as Japan's declined from 16% to 7%.
Related Articles:
The Budget and Economic Outlook: 2026 to 2036— The Congressional Budget Office projects the federal deficit will grow from $1.9tn (5.8% of GDP) to $3.1tn (6.7%) over a decade, above the 3.8% averaged over the past 50 years, with rising net interest costs driving much of the increase. Federal debt held by the public is projected to rise from 101% to 120% of GDP.
Are Government Bonds Safe in Times of War and Pandemic?— Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
Across The Rich World, Fiscal Crises Loom— An analysis estimates most rich countries could keep debt stable as a share of their economies with only small primary surpluses—Britain's required surplus is 0.3% of GDP—even if all debt were refinanced immediately at current rates, but the tightening needed to stabilize debt ratios exceeds 2% of GDP in Britain and America and 3% in France.
AI Summary.Average US weekly pay has risen 31% over six years, outpacing prices, but inflation erased most of those gains. Grocery prices are up about 30% since early 2020, a young married couple now needs 70% of annual household income for an average down payment versus 58% in 2019.
Mark Niquette, Jennah Haque and Jade KhatibBloomberg
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The US price level has risen 26% since January 2020, leaving Americans’ average weekly real wages up only 3.7% over five years.
Why do Americans feel squeezed when wages outpaced prices?
Core argument: Average American weekly pay has risen 31% over the past six years, outpacing prices in the aggregate, but inflation wiped out most of those income gains, and low earners now lag after leading wage growth following the pandemic.
The average American’s weekly pay has risen 31% over the past six years. That’s faster than prices across that period, so Americans in the aggregate aren’t losing ground — but inflation wiped out most of their income gains. For low earners, who saw the fastest wage growth after the pandemic, the last year or so has been tougher and they’re now lagging behind. [Grocery] prices are up about 30% since January 2020, about in line with average wage growth. But Americans had gotten used to paying roughly the same at the supermarket each week in the pre-pandemic years. Lately, they’ve been forced to stomach a bigger bill with almost every visit. A double-punch has pushed homeownership out of reach for many Americans: First the pandemic-era surge in prices, and then a steep run-up in mortgage rates. A young married couple now needs 70% of their annual household income to afford the average down payment, according to Goldman Sachs economist Elsie Peng, up from 58% in 2019 and 45% in 2000. [Further], the average principal and interest payment has doubled since early 2020, according to the National Association of Realtors. Employee premiums for family health insurance have risen 23% in the past five years to almost $6,900 on average. And more than 20 million people who rely on Affordable Care Act plans face a hike in their premiums after Congress let Covid-era subsidies expire.
Takeaways by Macro Roundup® AI
Average American weekly pay has risen 31% over the past six years, outpacing prices in the aggregate, but inflation wiped out most of those income gains, and low earners now lag after leading wage growth following the pandemic.
A young married couple needs 70% of annual household income to afford the average down payment, up from 58% in 2019 and 45% in 2000, according to Goldman Sachs economist Elsie Peng, while the average principal and interest payment has doubled since early 2020, per the National Association of Realtors.
Employee premiums for family health insurance have risen 23% in the past five years to almost $6,900 on average, and more than 20 million people on Affordable Care Act plans face premium increases after Congress let Covid-era subsidies expire.
Related Articles:
The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly— Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
Why Do We Dislike Inflation?— Survey evidence finds 80% of respondents believe prices rise faster than wages, though real weekly earnings for the median worker grew 1.7% between 2019 and 2023. About 40% think their nominal income would be higher had inflation been lower, and half expect wages to take over a year to catch up if inflation doubled.
A Mystery in Fixed Income— Long-term interest rates have drifted higher than short-term rates and oil prices would predict, an unusual pattern during Federal Reserve rate-cutting cycles. Proposed explanations include investor concern about growing Treasury debt issuance or an effective increase in the Federal Reserve's 2% inflation target.
AI Summary.Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
Zhengyang Jiang, Hanno Lustig, Stijn Van Nieuwerburgh and Mindy XiaolanNational Bureau of Economic Research
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US government bonds, normally safe assets, become risky in times of war because of negative real returns due to bursts of inflation. As in the fiscal theory of the price level, capital losses on the debt erase government liabilities and thus help absorb fiscal shocks.
Do government bonds remain safe assets during wars and pandemics?
Core argument: Government bonds severely underperform during wartime in absolute terms and relative to equities, housing, and GDP growth, contradicting the conventional wisdom that government bonds are safe assets.
The U.S. and the U.K. have managed to bring down high government debt/GDP ratios resulting from wars without resorting to explicit default, but rather through a combination of surprise inflation and financial repression. Contrary to the conventional wisdom that government bonds are safe assets, government bonds severely underperform in wartime, not only in absolute terms, but also relative to equities, housing, and GDP growth rates. This result contrasts with the returns to government bonds during financial crises, when bonds tend to outperform stocks. Wars and pandemics are different because fiscal spending is much higher and governments force bondholders to bear a substantial share of that fiscal burden through a combination of financial repression and surprise inflation.
Takeaways by Macro Roundup® AI
Government bonds severely underperform during wartime in absolute terms and relative to equities, housing, and GDP growth, contradicting the conventional wisdom that government bonds are safe assets.
The U.S. and U.K. reduced high war-driven government debt/GDP ratios without explicit default, relying instead on a combination of surprise inflation and financial repression that forced bondholders to bear a substantial share of the fiscal burden.
Bond performance in wars and pandemics contrasts with financial crises, when government bonds tend to outperform stocks, a difference attributed to much higher fiscal spending during wars and pandemics.
Related Articles:
Foreign Holdings of US Treasuries Climbed to Record in November— Foreign holdings of US Treasuries rose $112.8bn to a record $9.36tn, a figure reflecting both net purchases and valuation changes, according to US Treasury Department data. Increases in Norwegian, Canadian and Saudi holdings offset a $6.1bn decline in China's stockpile to $682.6bn, its lowest since 2008.
Can Treasury Markets Add and Subtract?— The authors estimate that Treasury yields rise on days when official cost estimates reveal deficit-increasing legislation, with a one-time 1 percentage point increase in the deficit-to-GDP ratio raising the 10-year yield by 0.75 basis points, or 6.75 basis points for a persistent deficit shock. The response reflects higher expected inflation and term premia alongside lower convenience yields.
Government Debt in Mature Economies. Safe or Risky?— When governments insulate taxpayers rather than bondholders from unfunded spending shocks, government bond yields rise as debt is marked to market, shifting the risk to bondholders — a "risky debt" regime the authors argue better fits recent experience. In that regime, large-scale central bank asset purchases give government bonds temporary price support at a net loss to taxpayers.
AI Summary.The article argues that the hiring downturn in occupations most exposed to generative AI reflects interest-rate sensitivity rather than AI itself, since roughly 38% of workers in the most AI-exposed quintile work in information, finance and insurance, and professional and technical services, versus under 2% in the least-exposed quintile.
Zanna Iscenko and Fabien Curto MilletAgglomerations
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The downtick in hiring in AI-exposed occupations started 6 months prior to the release of ChatGPT, and is “perfectly” aligned with the start of Fed rate hikes in Spring 2022. Sectors in the most AI-exposed quintile tend to be interest-sensitive.
Is the hiring slowdown in AI-exposed jobs driven by interest rates?
Core argument: Roughly 38% of workers in the most AI-exposed quintile of occupations work in Information, Finance and Insurance, or Professional and Technical Services, versus under 2% in the least-exposed quintile, according to an analysis of 2023 Census data.
The sharp downturn in hiring for AI-exposed occupations aligns perfectly with the Federal Reserve’s monetary policy timeline. The key to understanding the misattribution of this downturn to AI is that “AI exposure” and “interest rate sensitivity” are deeply correlated variables. The occupations rated as most exposed to generative AI are not randomly distributed across the economy. An analysis based on 2023 Census data reveals that occupations in the top quintile of AI exposure are overwhelmingly concentrated in sectors like “Information”, “Finance and Insurance”, and “Professional and Technical Services”. Approximately 38% of workers in the most AI-exposed quintile are employed in these sectors, compared to less than 2% in the least-exposed quintile. These are precisely the sectors most sensitive to capital costs and broad economic uncertainty.
Takeaways by Macro Roundup® AI
Roughly 38% of workers in the most AI-exposed quintile of occupations work in Information, Finance and Insurance, or Professional and Technical Services, versus under 2% in the least-exposed quintile, according to an analysis of 2023 Census data.
The author argues that the hiring downturn in AI-exposed occupations has been misattributed to AI because "AI exposure" and interest rate sensitivity are deeply correlated, with the most exposed sectors also the most sensitive to capital costs and economic uncertainty.
The author contends that the sharp downturn in hiring for AI-exposed occupations aligns with the Federal Reserve's monetary policy timeline.
Related Articles:
Canaries in the Coal Mine? Six Facts about the Recent Employment Effects of Artificial Intelligence— Using payroll records covering millions of US workers, the authors find employment for workers aged 22–25 in occupations most exposed to artificial intelligence, such as software developers and customer service representatives, declined 6%, while employment for older workers in those occupations rose 6–9%. Employment in less-exposed occupations grew comparably across age groups.
AI and Jobs: The Final Word (Until the Next One)— Unemployment has risen by 0.30 percentage points for the fifth of workers most exposed to artificial intelligence, compared with 0.94 percentage points for the least exposed fifth, leaving no visible AI effect on jobs. The share of workers leaving the labor force within a year is lowest among the most AI-exposed workers and roughly flat.
Our Favorite Charts of 2025— Wage growth is slowing more for lower-paid workers than for higher earners, limiting those households' ability to keep spending, while hiring is concentrated in select industries such as healthcare and among larger firms as small private firms shed workers. Layoffs remain low, but the number of workers unemployed for 27 weeks or more has only rarely been higher.
AI Summary.US interest rates have exceeded euro-area rates for well over a decade, with the federal funds rate target range at 4.25%–4.5% versus the European Central Bank's 2% deposit rate. The author argues this gap largely reflects stronger underlying US trend growth relative to Europe's underperforming economy.
Jesper RangvidRangvid's Blog
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Due to stronger growth, the underlying real short-term interest rate in the US is ~ 1pp higher than in the euro area. US inflation is also ~1pp higher. Jesper Rangvid concludes the current FFR is appropriate.
Do higher US interest rates than Europe's reflect stronger US growth?
Core argument: The federal funds target range stands at 4.25%–4.5% while the ECB's deposit facility rate is 2%, leaving US policy rates more than two percentage points above the euro area's.
The target range for the federal funds rate currently stands at 4.25%–4.5%. At present, the ECB’s key policy rate, the deposit facility rate, is 2%, more than two percentage points below the fed funds rate.The key point I want to make in this analysis is that US interest rates have been consistently higher than those in the euro area for well over a decade, dating back to 2012, and before that were usually higher too. Since rates began diverging in 2012, underlying US trend growth has risen relative to Europe’s. In essence, higher US interest rates thus largely reflect a stronger US economy. By the same token, there are solid reasons for lower rates in the euro area – namely, that its economy has underperformed relative to the United States.
Takeaways by Macro Roundup® AI
The federal funds target range stands at 4.25%–4.5% while the ECB's deposit facility rate is 2%, leaving US policy rates more than two percentage points above the euro area's.
US interest rates have been consistently higher than euro-area rates since 2012 and were usually higher before that as well.
Higher US rates largely reflect a stronger US economy, as underlying US trend growth has risen relative to Europe's since rates began diverging in 2012.
Related Articles:
Data Update 4 for 2025: Interest Rates, Inflation and Central Banks!— Interest rates are ultimately driven by macroeconomic fundamentals, with an "intrinsic risk-free rate" defined as the sum of the inflation rate and real GDP growth tracking the observed 10-year Treasury bond yield closely. On this view, central banks' influence comes from preferential access to data on those fundamentals, their capacity to alter them, and their credibility.
AI Summary.Interest rates are ultimately driven by macroeconomic fundamentals, with an "intrinsic risk-free rate" defined as the sum of the inflation rate and real GDP growth tracking the observed 10-year Treasury bond yield closely. On this view, central banks' influence comes from preferential access to data on those fundamentals, their capacity to alter them, and their credibility.
Aswath DamodaranMusings on Markets
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Aswath Damodaran defines an “intrinsic risk-free rate,” the sum of real GDP growth and inflation, which he finds is more predictive of 10-year yields than the FFR. He argues, “Interest rates ultimately are driven by macro fundamentals.”
Do macroeconomic fundamentals, rather than central banks, drive interest rates?
Core argument: Damodaran defines an intrinsic risk-free rate as the sum of the inflation rate and the real GDP growth rate in a period, and argues interest rates are ultimately driven by macro fundamentals rather than set by central banks.
Over the last two decades we have come to accept the notion that central banks set interest rates. [I] argue that interest rates ultimately are driven by macro fundamentals, and that the power of central banks comes from preferential access to data about these fundamentals, their capacity to alter those fundamentals (in good and bad ways) and the credibility that they have to stay the course. [I define] Intrinsic risk-free rate = Inflation rate in period t + Real GDP growth rate in period t. In the chart, I compare my estimates of the intrinsic risk-free rate to the observed ten-year treasury bond rate each year. While the match is not perfect, the link between the two is undeniable, and the intrinsic risk-free rate calculations yield results that help counter the stories about how it is the Fed that kept rates low between 2008 and 2021, and caused them to spike in 2022. I am not suggesting that central banks don't matter or that they do not affect interest rates, because that would be an overreach.
Takeaways by Macro Roundup® AI
Damodaran defines an intrinsic risk-free rate as the sum of the inflation rate and the real GDP growth rate in a period, and argues interest rates are ultimately driven by macro fundamentals rather than set by central banks.
Comparing estimated intrinsic risk-free rates with observed ten-year Treasury bond rates each year, Damodaran finds the match imperfect but the link undeniable, countering claims that the Fed kept rates low between 2008 and 2021 and caused the 2022 spike.
Damodaran attributes central banks' power to preferential access to data on macro fundamentals, their capacity to alter those fundamentals in good and bad ways, and their credibility to stay the course, while acknowledging they do affect interest rates.
Related Articles:
The Fed and the Secular Decline in Interest Rates— The authors find that the long-run decline in US Treasury yields since 1980 is fully accounted for by movements in a narrow window around Federal Reserve policy meetings, while yield changes outside that window prove transitory. They suggest the Federal Reserve conveys information to markets about the long-run level of interest rates.
The Move in Long Rates Is Very Unusual— The Federal Reserve has cut its policy rate by 100 basis points while 10-year interest rates have risen by 100 basis points over the same stretch, a highly unusual divergence. Possible explanations include fiscal worries, weaker foreign demand for U.S. debt, or rate cuts that were not justified.
Our Thoughts on Large US Deficits and Their Impact on Bond Yields— Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.
AI Summary.Analysis of Federal Reserve balance sheet reduction finds that households and broker-dealers absorbed the additional supply of Treasury securities during the 2017–2019 episode, with household holdings correlated with hedge fund holdings. In the first year of the reduction begun in 2022, households purchased a large share while hedge funds did not, and insurance companies and foreign investors also increased holdings.
Lucy Cordes and Erin FerrisFederal Reserve Board
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Since June 2022 the marginal buyer of Treasuries has shifted to domestic households, foreign hedge fund buyers, and insurance companies. @FederalReserve
Who buys Treasuries when the Fed shrinks its balance sheet?
Core argument: The authors find that households and broker-dealers absorbed the additional Treasury supply created by the Federal Reserve's 2017–2019 balance sheet reduction, with household Treasury holdings correlated with hedge fund holdings.
Understanding the marginal buyer of Treasury securities during balance sheet reduction has implications for Treasury yield volatility. Our analysis establishes that households and broker-dealers purchased the additional supply of Treasury securities resulting from the Fed's 2017-2019 balance sheet reduction period. [The “households” sector includes hedge funds, private equity funds, and personal trusts.] We find that Treasury security holdings of households are correlated with hedge fund holdings. Over the first year of the balance sheet reduction that began in June 2022, households purchased a large portion of Treasury securities the Fed no longer holds, but hedge funds did not make those purchases. In addition, we find that insurance companies and the rest of the world increased their holdings of Treasury securities during this period, in contrast to the pre-COVID balance sheet reduction.
Takeaways by Macro Roundup® AI
The authors find that households and broker-dealers absorbed the additional Treasury supply created by the Federal Reserve's 2017–2019 balance sheet reduction, with household Treasury holdings correlated with hedge fund holdings.
Over the first year of the balance sheet reduction that began in June 2022, households purchased a large portion of the Treasury securities the Fed no longer held, but hedge funds did not make those purchases.
Insurance companies and the rest of the world increased their Treasury holdings during the balance sheet reduction that began in June 2022, in contrast to the pre-COVID reduction period, according to the authors' analysis.
Related Articles:
The $27 Trillion Treasury Market Is Only Getting Bigger— Short-term Treasury bills have risen to 22.4% of outstanding U.S. government debt, above the 20% limit recommended by the committee that advises the Treasury on borrowing. Demand remains solid, with investors requiring no extra compensation to hold longer-term Treasurys and fewer alternatives available in corporate and mortgage-backed bond markets.
Who Is Buying US Treasuries?— The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks toward yield-sensitive buyers such as US households, pensions, and insurers. If the Federal Reserve cuts rates, demand from these yield-sensitive buyers could weaken, producing a steeper yield curve.
In 2023 Foreign Demand for Long Term Treasuries Exceed Net Issuances— Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.
