WASHINGTON: The International Monetary Fund (IMF) has warned that the escalating scale of US debt issuance is undermining the premium Treasuries have commanded from investors, with implications for government securities across the globe.
“The increase in the US Treasury security supply is compressing the safety premium that US Treasuries have traditionally commanded – an erosion that pushes up borrowing costs globally,” the Washington-based fund said in its latest Fiscal Monitor report.
The United States has been selling large volumes of debt because its budget deficit has averaged roughly 6% of gross domestic product over the past three years – a historically large shortfall outside of wartime or recession eras.
The gap is expected to stay around those levels throughout the coming decade, according to the Congressional Budget Office.
The IMF pointed to a narrowing gap between the yields of AAA-rated corporate bonds and Treasuries as a sign of reduced appeal for US government securities.
While spreads have typically been viewed as a gauge of the risk investors estimate for corporate borrowers, the fund is essentially flipping that analysis to view it as a metric of how much extra buyers are willing to pay for Treasuries.
“A narrowing spread implies that the premium investors pay for the safety and liquidity of Treasuries (relative to high-grade corporate debt) is compressing,” the IMF said.
The fund offered a chart showing AAA corporate spreads shrinking to roughly 35 basis points from more than 55 basis points at the start of 2019. Another danger the IMF flagged is the increasing reliance of the US Treasury on sales of short-dated debt.
Treasury Secretary Scott Bessent last year said that it didn’t make sense to expand issuance of longer-dated securities, given that their yield levels were above those of bills, which mature in up to a year.
“When debt is concentrated at shorter maturities, governments must refinance more frequently,” said the fund. —Bloomberg
