The annual net supply of Treasuries before the pandemic was $500bn. In 2023 it will be $1.5trn, with $1trn coming from the budget deficit and $500bn coming from Fed QT, see chart below.
This increasing supply of Treasuries is at risk of crowding out demand for other types of fixed income, including IG, HY, loans, and mortgages, in particular as the level of the risk-free rate continues to increase.
The upward pressure on rates because of the higher net supply of Treasuries is in addition to the upward pressure on rates coming from higher inflation.
The bottom line is that there is upside risk to rates not only from inflation but also from the growing supply of Treasuries, and the growing supply of Treasuries trading at higher rates could lower demand for other fixed income assets.
Source: CBO, FRB, Haver Analytics, Apollo Chief Economist. Note: QT is SOMA redemptions with cap assumed $60 bn per month in 2023
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