MS Government Bond Demand How Current Trends Are Shaping Future Market Dynamics

Global Rates Strategy Global Foundation

Morgan Stanley & Co. International plc+

How Current Trends Are Matthew Hornbach Strategist

Shaping Future Market Morgan Stanley & Co. International plc+

Martin W Tobias, CFA Central banks are retreating as structural buyers just as Strategist

sovereign issuance remains elevated. We combine and reconcile

multiple ownership, flow and supervisory datasets to map who Morgan Stanley & Co. International plc+

Fabio Bassanin, CFA is absorbing supply across the euro area, US, UK and Japan - by Strategist

investor type and, where possible, maturity. This allows us to

identify where demand is resilient, where it is increasingly price- Morgan Stanley MUFG Securities Co., Ltd.+

Koichi Sugisaki sensitive, and where supply may require higher yields or a Strategist

Morgan Stanley & Co. LLC Our framework combines and reconciles multiple ownership, flow and Eli P Carter supervisory datasets to identify who is absorbing sovereign supply as central Strategist banks step back. This allows us to distinguish between markets supported by

stable buyers and those increasingly reliant on valuation-sensitive demand.

Euro area: Banks and foreign investors are absorbing much of the decline in central-bank holdings. Domestic banks provide an important stabilising force, but non-euro-area investors tend to reduce exposure when spreads widen, leaving peripheral markets more vulnerable to a deterioration in foreign demand.

US: Treasury demand is shifting away from the Fed and foreign investors toward a broader set of private buyers. The result is a more diversified but more price- sensitive demand base, with buying increasingly driven by yields, curve shape, regulation and relative value.

UK: The decline in pension and LDI demand has shifted the buyer base towards banks, overseas investors and asset managers. Demand is strongest in shorter and intermediate maturities, while the long end remains more dependent on Morgan Stanley does and seeks to do business with attractive valuations and continued adjustment in the maturity composition of companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of issuance. interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Japan: The retreat of the BoJ and life insurers has weakened demand for super- Research as only a single factor in making their investment long JGBs, leaving the long end more dependent on price-sensitive investors. This decision. For analyst certification and other important disclosures, supports our view that the JGB curve remains structurally biased toward refer to the Disclosure Section, located at the end of this steepening. report. += Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member Please add me to your distribution list. and may not be subject to FINRA restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Government Bond Demand: How Current Trends Are Shaping Future Market Dynamics The era of central bank-dominated sovereign bond demand is fading. With government borrowing remaining elevated, the key question for rates markets is increasingly not whether supply will ultimately be absorbed, but which investors will absorb it, in which parts of the market, and at what price.

Across the euro area, the US, the UK and Japan, central banks are reducing their holdings, slowing purchases or moving towards balance-sheet frameworks that leave more sovereign risk in private hands. At the same time, several other traditionally stable buyers —including pension funds, insurers and foreign official institutions—are becoming less reliable or more selective. As a result, the behaviour of the marginal buyer matters more.

Exhibit 1: Marginal-buyer risk has many dimensions Exhibit 2: We take a cross-market look at how government bond demand is changing, focusing on who is absorbing supply Marginal buyer risk framework : issuance pressure + central bank runoff + private-sector price sensitivity + maturity preference as central…