Recently, the ongoing "US debt storm" has become the focus of almost all Wall Street traders' attention. And this week, even more significant news events will undoubtedly come one after another
Would you be surprised if a trader told you at the beginning of this week that the Fed's decision, which has always been highly regarded, may only be the "second most important" risk event on Wednesday? But in the eyes of many industry insiders, the situation may indeed be like this at that time.
Investors' attention on the day is likely to first focus on the US Treasury's new bond issuance plan, which will be announced a few hours before the interest rate decision is announced.
This so-called quarterly refinancing plan will reveal to what extent the US Treasury Department will increase the supply of longer-term bonds to fund the expanding budget deficit. These long-term bonds have been plummeting in the past few weeks, even after Federal Reserve officials signaled that they were "already or close to" ending interest rate hikes.
At present, the yield of long-term U.S. treasury bond has reached the high level before the global financial crisis, and the yield of 10-year and 30-year treasury bond has recently risen above the 5% mark, which has pushed up the interest paid by the U.S. government for long-term U.S. bonds. Investors are eager to see whether government officials will maintain the growth rate of mid to long-term US bond supply announced in their August plan against this backdrop.
In recent weeks, the cooling off of a series of US bond auctions has further increased attention in this area.
Angelo Manolatos, securities strategist of Wells Fargo Bank, told the media that "market participants are really concerned about the supply of treasury bond bonds, and we also know that the Federal Reserve is holding its ground. Therefore, the quarterly refinancing plan is a bigger event than the resolution of the Federal Reserve. This has a lot to do with the yield (turbulence) trend we have seen since the announcement of the refinancing plan in August."
What is the scale of this quarterly refinancing plan?
At present, many traders expect the quarterly refinancing operation size to be announced on Wednesday this week to be $114 billion, which has increased significantly since August to $103 billion - the first time in more than two and a half years that the US Treasury Department has increased the quarterly issuance size of longer-term bonds.
The specific composition of the $114 billion long-term bond auction plan may be as follows: on November 7, $48 billion of three-year treasury bond were issued ($42 billion in the previous quarter); On November 8, it issued US $41 billion of 10-year treasury bond (US $38 billion in the previous quarter); On November 9, it issued US $25 billion of 30-year treasury bond (US $23 billion in the previous quarter).
In the quarterly refinancing plan announced by the US Treasury Department in early August, the auctions of three-year, 10-year, and 30-year US bonds increased by $2 billion, $3 billion, and $2 billion, respectively. The issuance of all other notes and bonds also increased.
It is worth mentioning that another view drawn by several large traders in this forecast is that, considering the surge in yields, the growth rate of long-term bond issuance may be smaller and more dependent on bills maturing within one year or less. Some people believe that this adjustment may be combined with a signal that the next quarterly refinancing plan to be announced in early February next year may not necessarily further increase the scale of long-term US bond auctions.
Subadra Rajappa, head of U.S. interest rate strategy at Societe Generale SA, said that from the perspective of refinancing, the composition of treasury bond issuance may be very important and closely related to the market. As for Wednesday's other major event, this interest rate meeting has already reached a conclusion for the Federal Reserve.
In fact, even Federal Reserve Chairman Powell and his colleagues may be interested in investors' reactions to the refinancing plan. Powell and Dallas Fed Chairman Logan and others recently stated that the surge in long-term yields may mean a decrease in the need to raise benchmark interest rates. Logan was responsible for the Federal Reserve's market operations.
The biggest driver behind the US debt storm?
As of the end of last week, the 10-year US Treasury yield was reported to be around 4.8%, significantly higher than the quarterly refinancing plan announced in August by over 75 basis points.
Even after the outbreak of the Palestinian Israeli conflict three weeks ago, the US bond yield remained high - in the past, this geopolitical tipping point could stimulate the safe haven demand for US treasury bond bonds, but this time apparently did not happen.
Although US Treasury Secretary Yellen denied last week that US bond yields were rising due to federal debt inflation, Powell did list market attention to the budget deficit as a potential driving factor this month.
Data released earlier this month by the US Treasury Department showed that in the fiscal year ending in September, the federal deficit had approximately doubled compared to the same period last year, effectively reaching $2.02 trillion. It is precisely this deteriorating trend that prompted Fitch Ratings to strip the United States of its highest AAA sovereign rating on the eve of the August quarter's refinancing plan.
On Monday, the US Treasury will also lay the foundation for its issuance plan by updating quarterly borrowing estimates and cash balances. In August, officials planned to borrow a net of $852 billion between October and December. Lou Crandall of Wrightson ICAP LLC stated that he does not expect any downward revisions to Monday's update.
In addition to the bond issuance plan, investors will also pay attention this week to the latest progress of the US Treasury in developing an existing securities repurchase plan. The Ministry of Finance previously stated that the repurchase plan will be launched in 2024.
The fiscal deficit is not the only factor forcing the US government to borrow more funds from the public. The Federal Reserve is reducing its holdings of treasury bond at a rate of up to $60 billion per month. Powell believes that this process, known as quantitative tightening, is another potential factor leading to an increase in long-term returns.
Praveen Korapaty, chief interest rate strategist at Goldman Sachs Group, stated that "the US Treasury will have to raise funds for various maturities again on November 1st and February. Goldman Sachs economists believe that the Federal Reserve's quantitative tightening policy will not fully come to an end until early 2025.
All of this means that over time, the US Treasury may no longer have many options and can only go all the way to darkness.
Given that the announcement of the quarterly refinancing plan in August had triggered short-term sharp fluctuations in the US bond market. This time, on the day of the Federal Reserve's November resolution, turmoil may be even more difficult to avoid!