A major event for all spread products over the past year has been the accelerated pace of reduction of marketable Treasury debt outstanding. The process of Treasury debt reduction, which began in mid-1997 and which is projected by Chase Research Economics to continue well into the foreseeable future, will have profound implications for all fixed income investors. In the ABS market, there are already signs of a growing "shortage" of fixed income investment opportunities, as new issues from high quality names get scooped up at seemingly indiscriminate spread levels. The outlook for Treasury debt reduction suggests that this is a "new reality" and one that is, ultimately, very bullish for fixed rate ABS (far more on a yield basis than on a spread basis). An examination of some of the Treasury numbers supports this contention.
Figure 1 shows that Treasury debt grew from roughly $1.5 trillion in 1986 to a peak of $3.5 trillion in 1997, and now stands at about $3.0 trillion. The maturity composition of the debt is heavily front-loaded - almost 50% with maturities of three years and under. According to Chase Research projections1, the process of unwinding the debt has only just begun: over the next 10 years, the $3.0 trillion debt is projected to drop to under $1.0 trillion, at a rate of about $200 billion net reduction per year.