The US is undertaking a great experiment. What happens when a large serving of fiscal stimulus is provided to an economy that as already growing above trend, with nearly full employment and price pressures near target? 

Judging from the recent string of data, including Q1 GDP, the effects of the tax cuts are not yet evident. Yet, today’s refunding announcement indicates the bill is coming due. As it did earlier, the US Treasury is increasing the size of each coupon, including the floating rate note offerings, in the coming months. The market barely responded to the announcement.

Treasury Secretary Mnuchin is correct. The dollar bond market in general and the US Treasury market is deep and broad. The new supply is relatively small compared to the amount outstanding. In addition, the primary dealer system seems to nearly preclude a failed auction, i.e., one in which there are not sufficient buyers to absorb the amount that was being sold and happens on occasion in Europe, for example.  

The US will sell the debt. The question is who and at what price. Often in recent months, the primary dealers had to absorb a greater share of the supply. This risks the need to mark down their inventory to move it. Due in part to hedging costs, the conviction that US rates were headed higher, and the heavy US dollar, foreign investors did not appear to be significant buyers.  

Yields have risen in absolute terms and relative to many other countries. Some Japanese insurance companies have talked about boosting their unhedged allocation to the US at the start of the new fiscal year.  Consider the yield differential between the June 2019 Eurodollar and June 2019 Euribor is 300 bp in the US favor.  

The debt will be bought and likely without much fanfare this year. The number of negative yielding bonds is actually higher now than it was at the end of last year. That alone suggests a potential source of demand. The failure of US retail interest rates, like passbook savings and small CDs, to rise may be underpinning the household appetite for fixed income funds. Financial institutions also appear to be boosting their holdings.