Will Treasury's Upcoming Monster Borrowing Plans Outshine Fed's Interest Rate Call?

The spotlight on Wednesday could move from the Federal Reserve’s policy meeting to the Treasury Department’s forthcoming borrowing plan.

What Happened: The Treasury Department’s quarterly refunding announcement is expected to reveal its strategy to amplify sales of long-term debt, as reported by Bloomberg. This development surfaces as these long-term bonds have fallen for weeks, despite the Federal Reserve hinting at a possible cessation of interest rate hikes.

The sell-off has spiked yield levels to a point not witnessed since the global financial crisis, making issuance of long-term Treasury bonds pricier for the government.

As yields rise for the longer-dated Treasury securities, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) has tumbled 18% year to date, extending its declines following a 33% drop in 2022.

Market participants will keenly watch to see whether the pace of expansion in longer-term debt sales, as established in the August plan, will continue.

While Treasury Secretary Janet Yellen dismissed the notion that the rise in yields was directly linked to the growing federal debt in recent comments, Fed Chair Jerome Powell, in his remarks earlier this month, did highlight deficits as a potential factor to consider.

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Investors are placing significant emphasis on Treasury bond supply, as they widely expect the Federal Reserve to leave rates unchanged Wednesday, according to Wells Fargo strategist Angelo Manolatos.

The upcoming refunding event could therefore hold greater importance in the eyes of the market than the Federal Open Market Committee meeting.

Several bond traders are predicting a refunding size of $114 billion, which follows the trend set in the August plan. In August, this marked the first increase in issuance in over two years.

Yet there is an alternative perspective suggesting the growth in long-term debt may be more modest due to rising yields. This viewpoint also suggests a greater reliance on short-term bills maturing in a year or less. Some are speculating that the next refunding in February may not necessarily lead to a significant increase in long-term sales.

The JPMorgan Chase rates team is anticipating a scenario similar to what occurred in August, when officials estimated net borrowing of $852 billion for the period from October through December.

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