Global Markets Analyst_ The Many Facets of US Fiscal Risk Premia (Marshall_Zu_Abecasis)

Summary of Goldman Sachs Global Markets Analyst Report on US Fiscal Risk Premia Industry Overview - The report focuses on the US Treasury market and the implications of fiscal risk premia on long-term Treasury yields, particularly in the context of the upcoming 2024 US elections [2][8]. Key Points and Arguments Fiscal Outlook and Treasury Yields - The US debt-to-GDP ratio is projected to rise from 97% currently to 130% by 2034, indicating a significant increase in public debt [10]. - Despite the increase in debt levels, long-term Treasury yields and measures of bond term premia have remained relatively stable compared to historical standards [8][10]. - A 1 percentage point (pp) increase in the deficit-to-GDP ratio is estimated to raise long-term yields by approximately 20 basis points (bp) [5]. Sensitivity of Yields to Debt Levels - The sensitivity of longer-term G10 yields to debt-to-GDP has declined over the past three decades, attributed to increased private sector savings and asset values [3][20]. - The report suggests that while the fiscal picture has worsened, the market's ability to absorb Treasury supply has improved due to healthy domestic private sector balance sheets [4][19]. Demand Dynamics for US Treasuries - The demand for US fixed income has broadened over the decades, with foreign ownership of US Treasuries peaking at around 60% in the mid-2000s and currently at about 40% [27][28]. - Post-global financial crisis (GFC), domestic buyers have increasingly filled the gap left by foreign investors, driven by regulatory changes and shifts in financial asset demand [31]. Term Premia and Risk Perception - Term premia, which reflect the compensation investors require for holding longer-term bonds, are influenced by macroeconomic uncertainty and fiscal sustainability concerns [14][15]. - The report indicates that higher public debt can lead to increased term premia due to the supply-demand balance for duration and heightened fiscal concerns [15][16]. Future Projections and Risks - The report anticipates that the trend of rising term premia will be gradual as long as private sector balance sheets remain healthy [40]. - However, a rise in public debt without corresponding productivity growth could exacerbate the crowding-out effect and lead to greater fiscal risk [40][55]. Impact of Fiscal News on Yields - Adjustments in yields often occur abruptly in response to fiscal news, with historical patterns showing that significant revisions to Treasury borrowing estimates can lead to yield spikes [42][45]. - The report highlights that while the long-run sensitivity of yield levels to debt levels has decreased, changes in the fiscal outlook continue to significantly affect interest rates [49][54]. Additional Important Insights - The report discusses the interaction between short-rate expectations and term premia, noting that large increases in short-rate expectations are rarely accompanied by sharp increases in term premia [6][56]. - The analysis suggests that the relationship between fiscal news and yield changes is complex, often involving a larger component of fiscal uncertainty that can influence risk sentiment [54]. This comprehensive analysis provides insights into the dynamics of the US Treasury market, the implications of rising public debt, and the factors influencing long-term yields and fiscal risk premia.