• Morgan Stanley says US households have purchased almost half of the government’s total treasury supply in 2018.
• It marks a sharp turnaround from previous years, when households were often net-sellers of treasuries.

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The US government has an extra need for new funding following the rollout of the Trump administration’s tax cuts.

And to meet those needs, the US treasury department has been busy issuing new government bonds. Plenty of them.

Some analysts have raised concerns about the consequences of issuing more debt, at the same time as global central banks begin withdrawing liquidity from the financial system. More issuance and less demand typically puts upward pressure on yields.

But so far in 2018, US treasury auctions have seen healthy demand. And the bond analysts at Morgan Stanley have highlighted a big new buyer.

Here’s how MS succinctly put it — “Got treasury supply? No problem. Households will buy nearly all of it.”

The evidence:

Treasury demand from US households dwarfed that of the next-highest category, RoW (rest of world).

“Households remained the largest buyer of Treasuries for the second quarter in a row, and they have purchased 46% of the net treasury supply so far this year,” MS said.

The term “households” may conjure a picture of mum & dad investors on loading up on government debt as part of their investment portfolio. But the Federal Reserve’s definition of households is much broader than that.

According to the Fed’s accounts, “Households and Nonprofit Organisations” is a broad-based measure of all domestic assets in the US, including household investments in domestic hedge funds, private equity funds, and personal trusts.

To double-check the figures, we took a look at the source of the MS data — the Federal Reserve’s Financial Accounts of the United States for Q2 2018.

It’s a huge document, but buried on page 16 of 184 was a summary of Q2 transactions for “Households and Nonprofit Organisations”.

And sure enough, the data showed purchases of $US798.3 billion worth of US treasuries in Q2, tying into the MS chart above.

That followed a monster $US1.047 trillion in Q1. Here’s a snapshot of the relevant data:

The numbers reveal a sharp turnaround in demand from previous quarters going back to 2015, with the exception of Q2 2017. That suggests domestic demand played a key role in snapping up all the new US government debt on issue.

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