“Some market watchers fear that Fed tapering would lead to excess Treasury supply, which in turn would result in higher rates. However, in a recent research report published on Seeking Alpha, my colleague Antti Petajisto drills down into Treasury supply and demand to explain why this scenario isn’t likely.
“On the Treasury demand side, Antti points out that foreign central banks are big buyers of Treasuries, i.e. the Fed isn’t the only large player in the Treasury market. Meanwhile, on the Treasury supply side, he notes that a rapidly shrinking Federal budget deficit is leading to reduced Treasury issuance.
“Ultimately, Antti expects that by the time the Fed ends its stimulus, the Federal deficit will have fallen far enough that any new Treasury supply will almost match demand from foreign central banks (at least for the next couple years). The bottom line: Even with less Fed buying, modest net new Treasury supply suggests yields won’t rise dramatically in the next year.”