‘Treasury demand has become materially more valuation-sensitive’

The demand for US Treasuries has become considerably more sensitive to valuation, a change driven by a shift in the buyer base. Over the past decade, the influence of price-agnostic central banks has waned, while the importance of price-sensitive private investors has sharply increased. This phenomenon has major implications for how Treasuries trade.

Historically, a large portion of Treasury demand came from investors with structural or policy-driven reasons to own them, such as foreign official reserve managers and the Federal Reserve. Following the COVID shock, the Fed expanded its Treasury holdings to $6 trillion through large-scale asset purchases, but these holdings have since fallen to about $4 trillion. Foreign official holdings have also remained stagnant at around $4 trillion over the last decade, despite the continuous expansion of the Treasury market.

As a result, private buyers, including mutual funds, foreign private investors, banks, and households, have increasingly filled the gap. Total marketable Treasury debt outstanding grew from roughly $4 trillion in 2006 to an estimated $29 trillion in 2026, an increase of nearly $25 trillion. Private investors absorbed approximately $19 trillion of this increase, with the majority of this shift in ownership occurring over the past decade. In 2006 and 2016, official and private investors each held about half of the Treasury market. By 2026, the private sector's share is projected to rise to 73%, while the official sector's share is expected to fall to 27%.

This shift means that demand for Treasuries "has become materially more valuation-sensitive." Barclays analysts Demi Hu and Anshul Pradhan note that while individual buyer bases have mostly become less yield-sensitive, the overall aggregate elasticity index has climbed sharply due to the change in who buys the most Treasuries. This heightened sensitivity doesn't necessarily mean demand is weakening or that yields must be higher, but rather that yields must be sufficiently attractive to entice investors. This primarily plays out in the term premium, which is the extra yield investors demand for holding longer-term bonds compared to rolling over shorter-term ones.

Roberto Perli of the New York Fed also indicated that the changing ownership composition of Treasury securities from relatively price-insensitive official-sector holders to more price-sensitive private investors could impact the term premium component of yields.