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3 Minutes to Read (Reuters) – LONDON (Reuters) – Investors perplexed by the recent surge in US Treasuries despite high inflation in a roaring economy point to the most straightforward rationale for a price increase: more buying than selling. In this photo illustration taken in Seoul on February 7, 2011, U.S. one hundred dollar bills may be seen. Lee Jae/Reuters Won On Thursday, benchmark 10-year Treasury rates fell to 1.25 percent, their lowest level since February, the latest leg lower in a move that has many investors baffled. In a reflationary climate, bonds are often expected to be sold, driving yields – which move inversely to prices – to rise. However, bond markets’ recent behavior contrasts with that of other financial markets: U.S. stocks, as measured by the S&P 500 index, only achieved new highs on Wednesday. Some argue that the reflation story is being rethought, and that economic growth may have peaked. Others argue that the answer is purely technical in nature. On a 3-month moving average basis, the following graph depicts the Federal Reserve’s purchases of Treasury securities vs net issuance of Treasury securities. Click here for an interactive version: tmsnrt.rs/3dYsAid. Graph: Are there more buyers than sellers? The difference between Fed purchases and net issuance has decreased dramatically since April this year, with issuance dropping below purchases at one point in May. “Essentially, the Fed has been cutting down all of the net supply of Treasuries,” said Jeffrey Schulze, an investment strategist with ClearBridge Investments. “I believe there has been a bit of a supply… a short squeeze, if you will, on the Treasury market.” The three-month moving average of net Treasury issuance in May was lower than in March 2020, but it appears to be picking up again. In a research note, Deutsche Bank’s Jim Reid and Henry Allen wrote, “This is an extraordinarily rare event in a QE environment, and it’s more noteworthy since it’s coincided with the largest fiscal giveaway in history.” The United States Treasury’s choice last year to front-load borrowing with a big sale of 7-30 year bonds explains some of the reduction in Treasury issuance. In May, HSBC’s rates strategists predicted 1% 10-year Treasury yields at the end of 2021 and 2022, citing a “potential trigger” in the narrative “moving away from higher deficits and increasing supply.” Ritvik Carvalho contributed reporting, and Sonya Hepinstall edited the piece./nRead More

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