Why The 30-Year Treasury Lost Its Biggest Buyers | David Busch on Why High Yields Are Attractive Right Now

David Busch analyzes the current dynamics of the Treasury market, focusing on the rising yields and the implications for institutional investors. The 10-year Treasury yield has increased by about 60 basis points over the past six months, making fixed income investments more appealing compared to equities. This rise in yields compresses equity risk premiums, complicating the valuation of highly leveraged companies.

Busch highlights that the 30-year Treasury is losing its primary buyers, such as insurance companies and pension plans, due to competition from private credit and investment-grade corporate bonds. Despite the 30-year Treasury yielding approximately 5.29%, institutional investors are hesitant to assume the interest rate risk associated with long-term government securities. This reluctance is reshaping the supply-demand dynamics in the Treasury market.

The significant supply of Treasuries, combined with the allure of alternative investments, is driving this shift. Insurance companies are increasingly turning to private credit for higher yields, reflecting a broader trend in investment strategies. While private credit offers attractive yields, it also carries increased credit risk, contrasting with the U.S. Treasury curve, which remains the global benchmark.

Busch recommends a balanced investment strategy focused on Treasuries, particularly in the three to five-year range, as retail investors typically prefer shorter durations. The positively sloping yield curve allows for the acquisition of higher coupon five-year bonds, which can be rolled down to three years. He notes that the U.S. has $40 trillion in outstanding Treasury debt, contributing to elevated borrowing rates, with daily trade volumes in Treasuries around $1.2 trillion.

The Treasury's recent increase in bond buybacks from $2 billion to $4 billion, with actual buybacks reaching $6 billion, is primarily a market signaling strategy rather than a significant liquidity measure. Busch compares this buyback strategy to an operation twist, although he emphasizes that the volume remains minimal relative to daily trading activity.

Busch discusses the dollar's status as the world's reserve currency, despite concerns about the U.S. economy. He points out that gold contracts are traded in U.S. dollars, and the dollar's purchasing power improves when the Federal Reserve raises interest rates. He identifies sectors vulnerable to the current rate environment, particularly leveraged sectors like financial companies and real estate investment trusts.

He expresses optimism about software stocks, especially if AI revenues continue to grow, although he cautions against overestimating the impact of AI on complex tasks like tax and estate planning. Busch believes that while AI adoption will enhance margins and efficiency for software companies, the broader job market may face challenges, particularly for entry-level positions.

On energy, Busch highlights the risks associated with powering data centers and advocates for a diversified energy portfolio that includes both traditional and green technologies. He emphasizes the importance of monitoring developments in small nuclear reactors and access to rare earth minerals for future energy needs.

Busch also addresses private credit funds, which are marketed as offering equity-like returns while carrying bond-type credit risk. He warns that higher returns often come with greater risks than advertised and stresses the need for investors to understand the specific strategies and sectors involved. Many private credit funds are structured as interval funds with limited liquidity, posing risks for investors, especially during increased redemption requests.

His firm has largely avoided private credit due to these risks, conducting thorough due diligence before approving any credit-related investments. Busch notes that publicly traded business development companies (BDCs) provide more transparency regarding loans and yields compared to private BDCs, expressing skepticism about new products marketed to retail investors that originated in the institutional space.