Over the decade, 1995-2004, the demand for U.S. bonds of all types has surpassed new bond issues in eight of the last ten years. This is the reason that bond prices have held firm, even in 2003, when net new issues reached almost $1.8 trillion.

According the Federal Reserve Flow of Funds Accounts, six groups made up 90% of net bond buying over the decade:

    Foreign Investors...................................32.7%
    Mutual Funds........................................14.7%
    Insurance Companies.................................13.4%
    Government Sponsored Enterprises....................12.9%
    Banks, Savings Institutions.........................10.1%
    Federal, State, & Local Governments...............6.2%

The graph shows the breakdown of net bond buyers over the decade (the colored bars), against the supply of new bonds (the red line.)

As the graph indicates, only in 1998 and 2003 did bond supply catch up with demand, represented on the graph by the years in which the red buttons are at the top of the bars.

In most years, buyers had to go to the secondary market to get all the bonds they wanted.

(The bars on the graph that extend below zero can be interpreted as bonds acquired in the secondary market. See Flow of Funds Accounts Tables: F209, F210, F211, F212. )

	Supply & Demand: US Bonds

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Despite the high costs of the War on Terror, heavy consumer borrowing, and a recovery in the economy, new bond issues have been falling since 2003, as the graph shows. The four main segments of the bond market are Treasury securities (Table F209), agency securities (Table 210), municipals (Table F211), and corporate and foreign bonds (Table 212).

	Net Issues of Bonds

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Net new issues of agency securities turned negative in Q3 2005, as a result of the federal government’s crackdown on operations of Fannie Mae in late 2004.

(See: Flow of Funds Table F210, Agency- and GSE-backed Securities.)

This represents a withdrawal of over US$540 billion in the annual supply of these popular debt securities (the average net new issues from 1998 to 2003). This is part of the answer to Chairman Greenspan’s ‘conundrum’ as to why long-term interest rates did not rise as expected, in response to the Federal Reserve’s manipulation of short-term rates and the subsequent economic recovery.

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