Analysts are somewhat baffled by the drop in bond prices. Inflation is moderating and the Fed is sending "hold" messages. So what is driving bond prices to 20 year lows?
Maybe - just maybe - it's the oldest reason in finance: creditworthiness. After all, Fitch just downgraded the US from AAA to AA+.
Just how creditworthy is the US?
In just 4 years the US has raised its gross Treasury issuance from $12 trillion to a projected $21 trillion in 2023. Yes, it's not net issuance (ie after maturities/debt retirement), but bear with me for a bit. Gross issuance has gone from 50% of GDP in 2018 to 77% of GDP in 2023P - see charts below.
Why am I choosing gross issuance instead of net? Because if the US were to become less creditworthy (and it arguably has) some lenders could balk at rolling over their existing bond investments and/or demand a higher return.
I think this is exactly what is happening right now: increased supply (more gross issuance) is starting to face demand headwinds causing prices to drop.
Gross bond issuance is also a measure of debt service stress. Since the government is running massive budget deficits, it has to issue debt to cover that plus interest payments. And as interest rates rise, so does the amount of new debt required to pay just interest.