Markets Are Ready for More Bonds
Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset strategist. Along with my colleagues bringing you a variety of perspectives, today I'll discuss our outlook for global fixed income supply and demand in 2024. It's Tuesday, January 30th at 10 a.m. in New York.
This year is shaping out to be a big year for bond markets. We see global fixed income growth supply rising 12% to almost $11 trillion in 2024, and expect U.S. Treasury gross supply alone to increase 30% to $4 trillion in 2024. So the big questions investors are grappling with are one, what drives this increase in supply? And two, will there be sufficient demand and from where to meet the supply?
One of the drivers for this rise in supply is quantitative tightening or QT. As G4 central banks have undertaken aggressive measures to curb inflation, they've shrunk their balance sheets by about $250 trillion. Yes, that's trillion with a T, since January 2023, and we expect them to do so by another $245 trillion in 2024. With central bank buying of coupon bonds dropping off, someone else will need to step in.
A prevailing narrative in 2023 was that markets would get overwhelmed by the amount of fixed income issuance, either because of quantitative tightening or maturing corporate bonds, and this would push yields higher. Yields were indeed pushed higher last year, but it wasn't on the back of supply, instead, the economy turned out to be stronger than expected. And we think that 2024 will be no different. Gross and net issuance across global fixed income products will likely rise versus last year, but demand should be there to meet supply, especially in the second half of 2024, when central banks are expected to start cutting rates and rates volatility normalizes.
With that said, what is interesting to note is the shift in the type of buyers of bonds. Bank portfolios are the most likely to see a decrease in net buying, while we anticipate that demand will pick up for overseas investors, especially in the second half of the year.
Meanwhile, we think demand from U.S. pension funds remains strong. They've been big buyers of treasuries in the last few quarters, and should continue to support demand on the very long end of the curve.
Another important point is that foreign private demand for U.S. treasuries never really went away. Foreign official demand exhibits cyclicality with the fed rate cycle, that is, it decreases as the Fed hike rates and increases when the Fed cuts. Private demand from Japan is particularly cyclical, and we are already seeing signs of Japanese investors returning to the scene as the fed cycle peaks. We also think Japanese investors will find Agency Mortgage-Backed Securities, or MBS, attractive this year, but will likely commit capital only when volatility in both rates and the bases normalize.
Bottom line: as global fixed income supply rises in 2024, we think there will be sufficient demand to meet this increase.
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