The structural demand for US debt which underpins the dollar-based global financial system remains strong against the backdrop of recent Treasury market volatility, Moody’s Investors Service said on Monday.
The firm added US financial regulators have undertaken a series of measures to improve Treasury market resilience and efficiency, and that it expects the market structure will continue to evolve.
“Going forward, as the Fed reduces its Treasury holdings, foreign central banks, pension funds, insurance companies and households will be stabilizing factors in the market,” Moody’s said in a client note.
Earlier this month, Moody’s lowered its outlook on the US credit rating to “negative” from “stable” citing large fiscal deficits and a decline in debt affordability.
Federal spending and political polarization have been a rising concern for investors, contributing to a selloff that took US government bond prices to their lowest levels in 16 years in mid-October.
Treasury yields have soared this year on expectations the Federal Reserve will keep monetary policy tight, as well as on US -focused fiscal concerns.
The US economy grew almost 5 percent in the third quarter, again defying dire warnings of a recession, as higher wages from a tight labor market helped to fuel consumer spending and businesses restocked at a brisk clip to meet the strong demand.
The fastest growth pace in nearly two years reported by the Commerce Department’s Bureau of Economic Analysis last month in its advance estimate of third-quarter gross domestic product was also spurred by a rebound in residential investment after contracting for nine straight quarters.
Government spending picked up. But business investment dipped for the first time in two years as outlays on equipment like computers declined and the boost faded from the construction of factories related to a campaign by President Joe Biden’s administration to encourage more semiconductor manufacturing in the United States.
Though the blockbuster performance over the summer is likely not sustainable, it showcased the economy’s stamina despite aggressive interest rate increases from the Federal Reserve. Growth could slow in the fourth quarter because of the United Auto Workers strikes, the resumption of student loan repayments by millions of Americans and the lagged effects of the rate hikes.
The report also showed underlying inflation subsiding considerably last quarter. Most economists have revised their forecasts and now believe the Fed can engineer a “soft-landing” for the economy, citing expectations that the July-September period will show a continuation of second-quarter strength in worker productivity and moderation in unit labor costs.
“We’ve seen for a period of time now a post pandemic induced negative bias about an imminent recession and persistent inflation,” said Brian Bethune, an economics professor at Boston College. “But not only is the economy surprisingly resilient, we also got productivity-driven growth for two consecutive quarters in 2023, meaning the business cycle still looks very solid.”
Gross domestic product increased at a 4.9 percent annualized rate last quarter, the fastest since the fourth quarter of 2021. Economists polled by Reuters had forecast GDP rising at a 4.3 percent rate. The economy grew at a 2.1 percent pace in the April-June quarter and is expanding at a pace well above what Fed officials regard as the non-inflationary growth rate of around 1.8 percent.
Growth in consumer spending, which accounts for more than two-thirds of US economic activity, accelerated at a 4.0 percent rate after only rising at a 0.8 percent pace in the second quarter. It added 2.69 percentage points to GDP growth, and was driven by spending on both goods and services.
Though wage growth has slowed, it is rising a bit faster than inflation, lifting households’ purchasing power.
The increase in wages last quarter was partially offset by a rise in personal taxes, resulting in income at the disposal of households after taxes falling at a 1.0 percent pace. That led to consumers tapping their savings to fund some of their spending. The saving rate dropped to 3.8 percent from 5.2 percent in the second quarter.
The declining saving rate combined with the resumption of student loan repayments in October, which economists estimated was equal to roughly $70 billion, or around 0.3 percent of disposable personal income, could dent spending. Low-income consumers are increasingly relying on debt to fund purchases, with higher borrowing costs boosting credit card delinquencies.
Economists estimate that excess savings accumulated during the COVID-19 pandemic are mostly concentrated among high-income households and will run out by the first quarter of 2024. Some economists see a sharp slowdown around the corner, a concern shared by United Parcel Service, which on Thursday cut its 2023 revenue forecast for the second straight quarter.
