Citrini Research Claims Treasury-Fed Agreement Could Drive Up 30-Year U.S. Bonds

Citrini Research indicates that collaboration between the U.S. Treasury and the Federal Reserve may lead the government to increasingly turn to short-term debt financing, thereby reducing the supply of long-term U.S. Treasury bonds and creating conditions for an increase in 30-year U.S. bonds. The agency believes that changes in U.S. bank regulation, Treasury debt management, and Federal Reserve balance sheet policy are converging to form a new "Treasury-Fed Agreement." Under this framework, the Federal Reserve will reduce its balance sheet, while commercial banks will expand their own balance sheets. As the government reduces long-term bond issuance in favor of more Treasury bills, banks will absorb more short-term Treasury bonds. Citrini suggests that the reduced supply of long-term Treasury bonds may help lower long-term yields and recommends clients bet on 30-year U.S. bonds outperforming 5-year Treasury bonds, meaning the yield spread between the two will narrow.

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