U.S. Tsy Supply/Demand Mix Argues For Higher Financing Costs In ‘23

Goldman Sachs note that “Treasury net supply should rise in notional terms by $200-250bn from last year, driven disproportionately by higher bill supply.”

• “Quantitative tightening means that non-Fed buyers will have to absorb a more significant increase in supply in 2023, however, with net supply ex-Fed poised to be the highest on record.”
• “We believe the bill-heavy nature of issuance this year will likely be sufficient to incentivize renewed and significant money fund buying.”
• “Further out the curve, the household sector is likely to remain a major buyer after what looks to have been record net purchases in 2022.”
• “Increasingly, that household demand appears to reflect levered buying, a trend we expect will continue this year.”
• “The significant rise in bill supply in conjunction with increased demand for repo financing should correspond to upward pressure in USD funding costs, though debt ceiling considerations will most likely backload some of these effects.”
• “Additionally, we expect quantitative tightening will see further accumulation of Treasuries on dealer balance sheets, which ought to sustain the already elevated dispersion in off-the-run Tsys. More structural pension buying, alongside firming in foreign official sector buying, will be pockets of support for the Treasury market, in our view.”