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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The Fed held rates steady Wednesday, yada yada.
But as we flagged earlier this week, the big news came from the fiscal side of policy. Long-maturity notes and bonds rallied most after the Treasury Department published its issuance plans for the coming quarter.
The benchmark 10-year yield slid as much as 12bp after the Treasury’s refunding announcement, v FactSet. It almost recaptured the day’s lows after the Fed statement, but hadn’t quite gotten there by 6:30pm UK time. To wit:
In other words, not much has changed for the Fed, besides “tighter financial and credit conditions” doing their work for them. (In prior statements, officials only cited credit conditions, not financial.)
Wednesday’s bond-market rally was instead fuelled by the Treasury’s projections that it will slow down its recent flood of new long-dated debt supply. This slowdown occurred in two distinct ways.
First, 10-, 20- and 30-year Treasury auctions will be smaller than feared in the next few months, according to the latest quarterly refunding materials. Analysts at CreditSights said that the Treasury “leaned more heavily on 2y and 5y notes than we had anticipated.”
And crucially, the US Treasury Department said it sees an end to the growth in its auction sizes:
. . . Treasury anticipates that one additional quarter of increases to coupon auction sizes will probably be needed beyond the increases announced today.
(That’s April, for folks following along at home.)
Here’s the Treasury’s chart outlining the breakdown of debt sales for the next few months, by maturity:
The market response to Wednesday’s two news items is another sign that supply/demand dynamics are indeed behind the violent steepening of the US yield curve that started since this summer.
Policy rates certainly matter for the shape of the yield curve, of course. The Fed’s statement pushed fed funds futures markets to price in a greater probability that the US central bank is done hiking for this economic cycle.
But the Fed has purposefully refused to guide towards marginally looser policy, even as the CME’s FedWatch tool implies that short-term rates are at their peak. Powell said Wednesday that officials haven’t yet made any decisions about the December meeting:
“The idea that it would be difficult to raise [rates] again after stopping for a meeting or two is just not right,” he added.
In contrast, the Treasury provided a transparent timeline for when the US debt market can expect some form of relief. Even if it’s just marginal relief from supply pressures. That extra certainty is apparently worth a pretty penny to traders and investors.
