This Week's Major US FOMC and Treasury Issuance Events... Will They Fuel the Rising US Treasury Yields?

FOMC Meeting Expected to Keep Benchmark Interest Rate Steady
More Focus on Treasury Department's Debt Refinancing Scale
Market Expects $114 Billion, Exceeding August Plan
Concerns Over Additional Interest Rate Stimulus

Recently, with U.S. Treasury yields surpassing 5% for the first time in 16 years, global financial markets have focused their attention on this week's U.S. monetary policy meeting and the Treasury's debt refinancing issuance plan announcement. Since the benchmark interest rate is expected to remain unchanged at this meeting, as it did last month, the market is paying close attention to the size of the Treasury issuance. If this plan exceeds expectations, interest rates could rise again, prompting the market to await the U.S. Treasury's announcement with a mix of concern.

According to major foreign media on the 30th, the U.S. central bank, the Federal Reserve (Fed), will decide on the benchmark interest rate at the Federal Open Market Committee (FOMC) regular meeting held from the 31st of this month to the 1st of next month (local time). A few hours before the FOMC results are announced, the Treasury will hold auctions for Treasury sales and announce its quarterly debt refinancing plan, which includes issuing long-term Treasury bonds.

The market is paying more attention to the size of the Treasury refinancing issuance among the two events. This is to gauge the potential market interest rate fluctuations depending on the size of the Treasury issuance. The recent rise in Treasury yields is attributed to the prolonged high interest rate outlook and the U.S. government's large-scale Treasury issuance to address chronic fiscal deficits.

When the Treasury announced in August that it would issue $103 billion in long-term Treasury bonds, exceeding the initial plan of $96 billion, interest rates began to soar. The U.S. 10-year Treasury yield, a global bond benchmark, surged from around 4.0% in early August to surpass 5% in mid-month for the first time in 16 years since 2007, and currently holds around 4.8%. The market expects the Treasury's refinancing issuance size to be around $114 billion, exceeding the August plan, anticipating further interest rate increases.

The U.S. government's fiscal deficit is in a serious state. According to the Treasury, the federal government's fiscal deficit for the 2023 fiscal year reached $2.02 trillion by September, doubling compared to a year earlier. As the U.S. government expands Treasury issuance to cover the deficit, the total issuance now stands at $26 trillion, doubling over eight years. Although U.S. Treasuries are considered a global safe asset, the massive volume has caused yields to skyrocket. In particular, China, a major buyer of U.S. Treasuries, is reported to have sold off Treasuries recently to defend the rapidly falling yuan, further worsening the supply-demand situation.

The Fed is also expected to closely monitor the Treasury's refinancing issuance size and investor reactions. Fed officials, including Lorie Logan, President of the Federal Reserve Bank of Dallas, have recently mentioned that the sharp rise in long-term interest rates suggests a reduced need for further benchmark rate hikes.

The market expects the Fed to keep the benchmark interest rate unchanged at this FOMC meeting. The current local benchmark rate is between 5.25% and 5.5%. According to the Chicago Mercantile Exchange (CME) FedWatch, as of this day, the federal funds futures market reflects a 97.4% probability that the Fed will hold rates steady at the FOMC regular meeting from the 31st of this month to the 1st of next month, up 15.7 percentage points from 81.7% a month ago.

Angelo Manolatos, strategist at Wells Fargo Securities, said, "Market participants are currently extremely focused on (U.S. Treasury) supply," adding, "We know the Fed will hold (rates) steady." He further stated, "The Treasury refinancing issuance is a bigger event than the FOMC," noting, "This is closely related to the yield fluctuations since the August refinancing issuance."

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