Who is the marginal. bond buyer?

 

To price assets, you ned to know who will be the marginal buyer who will clear the market. How sensitive is the buyer to value or economic shocks? For the longest period in the US, the Fed was the marginal buyer through QE. QT was tried, but there always seems to be a hesitancy that selling would stop or slow down if rates rose too quickly. Now, the world has changed. The marginal buyers are private investors. Those private investors may either be domestic or foreign. Again, the issue is whether the marginal buyer needs to hold safe assets regardless of valuation or whether these buyers focus on valuation. I place less emphasis on Treasury arbitrage and basis traders, which is a different problem. If the perception is that bonds are expensive, or, more importantly, that rates are trending higher, yields will clearly be higher. 

Nominal yield will fall only if inflation expectations fall, term premiums fall because risk is perceived as lower, and real rates move lower because growth slows. Pension funds and insurance accounts will drive the US bond market. These buyers do not have to be vigilantes; they can just price-sensitive investors.