Treasury bond buyers are increasingly households - and they could help keep a lid on yields

• Today's yields are high enough to bring back bond buyers, Goldman Sachs said.
• Already, households have jumped into the bond market and now own 9% of outstanding Treasurys.
• But surging bond demand may put downside pressure on equities in the next year.

The massive sell-off in Treasury bonds may have rattled markets over the past weeks, but enough new buyers are coming in to help keep a lid on yields, Goldman Sachs said.

While the market is experiencing one of history's declines, households have stepped up as buyers and now own 9% of outstanding US Treasury bonds, up from 2% at the start of 2022, according to a note published on Friday.

In fact, households accounted for 73% of net Treasury purchases from 2022 through the second quarter of 2023. That helped offset the net declines at the Federal Reserve, which is shrinking its balance sheet, as well as mutual funds and ETFs.

"Treasury yields are likely to remain contained given the attractive risk/reward of owning a 'risk free' asset yielding well in excess of the economy's potential growth rate," Goldman's David Kostin wrote.

Recent lackluster Treasury auctions have raised concerns about demand, and Goldman Sachs noted that this reflects worries about US fiscal policy, where a ballooning deficit has forced the Treasury to issue substantially more bonds.

But analysts don't see a supply-demand imbalance in the market. Instead, high yields could put downside pressure on equity demand moving forward, Goldman cautioned. 

Given the fact that households make up an overwhelming share of equity holdings, Kostin expects that they will engage in moderate selling through 2024.

Meanwhile, Goldman sees pensions selling $250 billion in equities next year after offloading $315 billion in stocks year-to-date. Similarly, mutual funds are expected to sell $250 billion in equities.

This will offset stock purchases made by foreign investors, who have jumped into US equity markets. It will also leave US corporations as the largest source of stock demand next year, expected to be net buyers of $550 billion.