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The upcoming Federal Reserve policy statement may not be the most significant financial event on Wednesday. Instead, all eyes will likely be on the Treasury Department’s quarterly refunding announcement, set to be released ahead of the Fed’s interest-rate decision.
This critical announcement will shed light on the Treasury’s plans to increase the sales of longer-term debt as a means of financing a growing budget deficit. These longer-term securities have been experiencing a downward trend for several weeks, even in the face of statements from Fed officials that suggest they may have reached the end of the road in terms of rate hikes.
This selloff has pushed yields to levels not seen since before the global financial crisis, making it more expensive for the government to issue longer-term Treasuries. Investors are keen to learn whether officials will continue with the same pace of longer-term debt sales as outlined in the August plan. Recent bumpy auctions of some securities have only amplified the focus on this issue.
“Market participants are really hyper-focused on supply now, and we kind of know the Fed is on hold,” said Angelo Manolatos, a strategist at Wells Fargo Securities. “So the refunding is a bigger event than the FOMC. It also has a lot to do with the moves we’ve seen in yields since the August refunding.”
Many bond dealers predict a refunding size of $114 billion, consistent with the cadence of increases set out in the August plan, which represented the first step up in issuance in over two years. However, some major dealer firms have a different view, suggesting a smaller bump in longer-term debt due to the surge in yields and an increased reliance on shorter-term bills.
Some even anticipate a signal that further increases in long-term sales may not be guaranteed for the next refunding in February.
“The composition of Treasury issuance might be very consequential and relevant to the market,” said Subadra Rajappa, head of US interest rates strategy at Societe Generale SA. She views this refunding as a significant event, while the Fed’s announcement is seen as more of a placeholder.
Indeed, Fed Chair Jerome Powell and his colleagues will be watching the market’s reaction to the refunding closely. The surge in long-term yields could mean a reduced need to raise the benchmark rate, according to Powell and other Fed officials.
Ten-year yields reached approximately 4.8% by the end of last week, well over three-quarters of a percentage point higher than before the August refunding. Even geopolitical events, such as the recent Israel-Hamas war, did not push yields significantly lower as they might have in the past.
While Treasury Secretary Janet Yellen dismissed the idea that yields were climbing due to rising federal debt, Powell listed deficits as a potential contributing factor.
The Treasury is set to provide an update of quarterly borrowing estimates and cash balance on Monday, which will set the stage for its issuance plans. Despite the worsening deficit trajectory, analysts do not expect a downward revision in Monday’s update.
Given the August increase in refunding issues, which included 3-year, 10-year, and 30-year Treasuries, experts anticipate a similar pattern this time.
If a $114 billion refunding plan is confirmed, the following quarterly refunding auction sizes are expected:
- $48 billion of 3-year notes on Nov. 7
- $41 billion of 10-year notes on Nov. 8
- $25 billion of 30-year bonds on Nov. 9
This situation is likened to a “rinse and repeat” of August, as suggested by the JPMorgan Chase & Co. rates team. However, some institutions, including Wells Fargo, Goldman Sachs Group Inc., Barclays Plc, and Morgan Stanley, anticipate a shift towards short-term securities this time, especially due to the surge in long-term rates.
While the Treasury maintains its commitment to being “regular and predictable” with its debt-issuance plans, the group of dealers anticipating a change in the pace of expansion argues that the Treasury’s credibility would remain intact, given the August TBAC guidance on bills and expectations of increased auctions of all coupon-bearing maturities.
Aside from issuance plans, investors will also be eager to learn about the Treasury’s progress in assembling a program for the buyback of existing securities, set to begin in 2024.
With the deficit and quantitative tightening (QT) – the Fed’s reduction of its Treasury holdings – contributing to the rise in long-term yields, the Treasury may not have much choice but to adapt.
As the market awaits the 8:30 a.m. refunding details, it’s bracing for potential volatility in the wake of the announcement. The Treasury’s decisions will likely play a crucial role in determining market clearing prices, and investors will be closely watching how the market receives the supply.
In this dynamic landscape, Treasury’s ability to adapt its issuance plans based on market conditions will be tested once again, ensuring that it remains a reliable and flexible source of financing in the face of growing challenges.
