AEP: "Bond shortage deepens as US Treasury stops issuing debt"

Ambrose Evans-Pritchard at the Telegraph:

The US government paid off more debt than it issued last month in a stunning turn-around for America’s public finances, causing an acute shortage of bonds and a further downward slide in borrowing costs.

Net issuance of notes and bonds by the US Treasury plunged below zero in April as tax revenues surged, a feat last achieved for fleeting moments at the end of the global economic boom in 2008.

The dramatic improvement comes as US federal spending settles  at 20.5pc of GDP, down from 24.5pc after the Lehman crisis, and roughly comparable to where it was at the end of the Reagan era in the 1980s.

America’s $19 trillion of existing debt is no longer enough to satisfy voracious demand from investors, forcing them to accept ever lower returns.

“The US government simply doesn’t have the same financing needs any more. Pension funds are having to buy whatever they can get,” said Torsten Slok from Deutsche Bank.

The lack of the new bonds has pushed down yields on 10-year US Treasuries to 1.74pc, close to the historic lows reached during the eurozone debt crisis four years ago.

US Treasury issuance of bonds turned negative in April as tax revenues poured in Credit: Deutsche Bank

The return on US municipal bonds has dropped to an all-time low of 2.45pc despite the default crisis in Puerto Rico.

The slide in yields raises eyebrows since US core inflation has crept up to 2.3pc. The Atlanta Fed’s measure of ‘sticky price’ inflation is running at 2.5pc. US wages have been rising at an annual rate of 4pc over the last three months.

Interest rates in the US are now deeply negative in real terms by any measure, and are falling further each month. This has its roots outside the US:  global deflationary forces are playing havoc with yields in all the major economies....MORE