A recent Bloomberg headline prompts us to consider if the roster of investors for US Treasury bonds, particularly “non-commercial” buyers, is about to shrink significantly. This inquiry surfaces just as discussions regarding the balance sheet policy of the Federal Reserve are heating up. During the extended QE era, the Fed acted as the definitive non-commercial purchaser. Now that the central bank is withdrawing, and with indications that major foreign holders might lower their US overweight positions, we appear to be witnessing a structural shift.

Despite these movements and the fact that Japanese yields are trending upward, the current effect on yields remains surprisingly quiet. This stability supports the theory held by various market participants that the Administration is keenly aware of how yields affect mortgages. Consequently, should yields rise aggressively and remain sustainably high, the government may be prepared to evaluate a variety of remedial measures.

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