Investors are eagerly awaiting the Treasury Department’s quarterly refunding statement, which is set to be released on November 1. This update will provide details on the department’s bond issuance plans for the next three months. Previous reports have raised concerns about the bond market’s appetite for additional Treasurys, leading to a historic price collapse.
Recently, investor demand for Treasurys has shown signs of weakness, coinciding with the government’s increasing deficits and the influx of more debt into the market. The Treasury Department, in August, already hinted at the need for increased Treasury supply.
Wall Street is aligned with this outlook, with institutions raising their expectations for the size of US debt issuance. Bank of America has revised its deficit expectations for the coming years, forecasting that US overspending will reach $2 trillion by fiscal year 2026, up from $1.7 trillion in 2023. Higher interest expenses on US borrowing will be a key driver in this trend, necessitating the continued issuance of more bonds by the Treasury.
Bank of America also expects auction sizes to increase in November, followed by moderate expansions over the next six months. If the Federal Reserve’s quantitative tightening ends in June 2024, analysts estimate that debt supply during 2024 will be around $1.34 trillion in 10-year equivalents, $90 billion higher than previously forecasted.
JPMorgan has also projected higher Treasury issuance ahead, as the fiscal 2023 deficit exceeded their estimates by $100 billion. The bank predicts that the Fed’s QT will continue through 2024, creating a financing gap of $720 billion. As current auction sizes are insufficient to meet this figure, JPMorgan anticipates a repetition of the August auction increase.
However, Morgan Stanley has a more conservative stance, suggesting that markets may be in for a November surprise. The Treasury might choose to increase coupons at a slower rate than previously expected, with a higher share of issuance in the form of T-bills rather than coupons through 2024.
Overall, the upcoming quarterly refunding statement from the Treasury Department has attracted significant market attention. Investors and Wall Street banks are closely monitoring the department’s bond issuance plans, considering the potential impact on yields and market dynamics. The size and timing of future Treasury supply will likely have implications for the bond market and investor sentiment.
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