Bond investors to focus on Treasury’s new borrowing plan
The Federal Reserve’s policy statement is setting up to be the No. 2 event on Wednesday, with investor focus instead likely to be on the Treasury Department’s new borrowing plan, due hours ahead of the interest-rate decision.
The so-called quarterly refunding announcement will reveal the extent to which the Treasury will ramp up sales of longer-term debt to fund a widening budget deficit. Those securities have been tumbling for weeks, even amid signals from Fed officials they’re “at or near” the end of rate hikes.
The selloff has sent yields to the highest levels since before the global financial crisis — making longer-term Treasuries more costly for the government. Investors are eager to see whether officials maintain the pace of increase in longer-term debt sales they announced in the August plan. Bumpy auctions of some securities in recent weeks have only increased that focus.
“Market participants are really hyper-focused on supply now and we kind of know the Fed is on hold,” Angelo Manolatos, a strategist at Wells Fargo Securities, said in a telephone interview. “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, representing the same cadence of increases per each refunding security as laid out in the $103 billion August plan, which marked the first step up in issuance in more than two years.
An alternative view predicted by several large dealer firms would be a smaller bump in longer-term debt, given the surge in yields, and greater reliance on bills, which mature in a year or less. Some see this tweak potentially combined with a signal that a further increase of longterm sales isn’t certain for the next refunding, in February.
“Looking at the refunding, 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. As for the other Wednesday event, “this meeting is sort of a placeholder for the Fed,” she said.
Indeed, Fed Chair Jerome Powell — a former Treasury official himself — and his colleagues may take interest in investor reactions to the refunding. He and others, including Dallas Fed President Lorie Logan, who previously oversaw the Fed’s market operations, have said the surge in long-term yields may mean less need to raise the benchmark rate.
Ten-year yields were around 4.8 percent at the end of last week, well over three-quarters of a percentage point higher than before the August refunding. Yields remained high even after the outbreak of the Israel-Hamas war three weeks ago – the kind of geopolitical flashpoint that can spur haven demand for Treasuries. Israel’s weekend invasion of Gaza will again test previous norms.
While Treasury Secretary Janet Yellen on Thursday rejected the idea yields were climbing due to swelling federal debt, Powell this month did list a focus on deficits as a potential contributing factor.
Earlier this month, Treasury data showed the federal deficit roughly doubled in the fiscal year through September compared with the year before, effectively reaching $2.02 trillion. The worsening trajectory helped prompt Fitch Ratings to strip the US of its top-tier AAA sovereign rating on the eve of the August refunding.
On Monday, the Treasury will set the stage for its issuance plans with an update of quarterly borrowing estimates, and for its cash balance. In August, officials penciled in net borrowing of $852 billion for October through December. Lou Crandall at Wrightson ICAP LLC says he’s not expecting any downward revision in Monday’s update.
US debt managers in August lifted the refunding issues, which include 3- and 10- and 30year Treasuries, by $2 billion, $3 billion, and $2 billion relative to each of those securities’ previous auctions of new debt. They also increased issuance of all other note and bond maturities, something dealers see happening again this time.