The resilience of the U.S. economy has previously shaken the confidence of the U.S. Treasury market in future rate cuts, and now the market is focusing on how long the U.S. government can avoid issuing more bonds.
Despite the U.S. fiscal deficit continuing to hit historical highs, since May, the U.S. Treasury has issued guidance stating that it will "maintain the size of bill and bond auctions unchanged for at least the next few quarters."
The next quarterly refinancing announcement will be released on Wednesday, and bond traders widely expect that the total amount of refinancing auctions will reach $125 billion for the third consecutive quarter. The question is whether the guidance of "maintaining the size unchanged for a few quarters" will be retained. If the guidance remains unchanged, it means that stimulus measures will not be introduced until around mid-2025.
Maintaining the current issuance size will result in the following situation in next week's refinancing auctions:
- Issuing $58 billion in 3-year bonds on November 4th;
- Issuing $42 billion in 10-year Treasury bonds on November 5th;
- Issuing $25 billion in 30-year bonds on November 6th;
It is worth noting that some U.S. Treasury auctions, including the 10-year bond auction, have reached record levels. Any signs of increased supply could further disrupt the bond market, with bond yields rising sharply in recent weeks.
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The Treasury is less likely to take risks in modifying the guidance.Jefferies Senior Economist Thomas Simons stated:
The Treasury's reiteration of "a couple of quarters" at this time seems to be a rather significant commitment, but they might do so.
JPMorgan Chase's U.S. Inflation Strategy Head Phoebe White said:
If the market has become accustomed to a certain kind of forward guidance from the Treasury, and this guidance has influenced the expectations and behaviors of market participants, then any change to this guidance, or the removal of such wording, could potentially panic the market.
In the meantime, companies such as JPMorgan Chase, Citigroup, and RBC Capital Markets all believe that there will be no changes to the scale of quarterly auctions and forward guidance. However, Wells Fargo anticipates a slight change in wording, but not enough to anger investors. Wells Fargo strategist Angelo Manolatos said:
We believe the Treasury may fine-tune their guidance on coupon increases, but without implying an imminent hike.
RBC Capital Markets' U.S. Rates Strategy Head Blake Gwinn said:
If the Treasury is subject to debt ceiling constraints after January 1st, they would be unwilling to increase coupon rates, so retaining the stable auction guidance of "a couple of quarters" seems to be the best option.