US Rates: See you next (fiscal) year
At a Glance
Per the full note source, J.P. Morgan's rates strategists interpret Treasury's August refunding announcement as a signal of stable near-term issuance, with the real risks deferred to fiscal year 2027. The desk argues that the current coupon curve's resilience is underpinned by solid demand from price-insensitive buyers, despite structural deficit concerns. This view runs somewhat counter to the broader market narrative that heavy supply will force term premiums higher. With no high-impact US data on the immediate calendar, the focus shifts to the September FOMC and the potential for a repricing in rate expectations. The immediate implication for FX is that a steady rates backdrop removes a potential volatility catalyst for USD crosses, allowing other drivers to dominate.
Key Takeaways
- 01Treasury's August refunding maintains steady coupon sizes, deferring structural supply concerns to the next fiscal year.
- 02Near-term yield stability is supported by robust demand from price-insensitive buyers, mitigating supply-driven selloff risks.
- 03The desk's view contrasts with the market narrative that heavy supply will push term premiums higher.
- 04With no high-impact US data on the calendar, the focus shifts to the September FOMC for potential rate expectations repricing.
Full Analysis
What the desk is arguing
J.P. Morgan's rates strategists, Jay Barry and Amanda Berke, argue that the August refunding announcement represents a 'see you next fiscal year' moment, meaning that the Treasury is effectively punting on addressing structural supply concerns until the next fiscal year begins. This framing suggests that near-term issuance will be manageable and largely expected, thereby reducing the risk of a supply-driven selloff in the coming months.
Supporting this view, the desk likely points to the Treasury's decision to keep coupon sizes steady, which has been a source of relief for the market. The August refunding typically sets the tone for quarterly issuance, and by maintaining the current size, the Treasury is signaling that it is not yet ready to increase supply despite widening deficits. This supports the recent stability in yields, as the market had braced for a larger increase.
The alternative read, which the desk is implicitly rejecting, is that the Treasury's inaction merely delays the inevitable, and that the market should be pricing in larger auctions in the future. However, the desk appears confident that the demand side remains robust enough to absorb the current supply, and that any fiscal reckoning is a matter for a later date, not a concern for the immediate horizon.
Market Implications
Watch for continued stability in US yields, with the 10-year likely to remain rangebound in the absence of new supply catalysts. The September FOMC meeting becomes the next key event for USD direction, as any shift in rate expectations could prompt a repricing across USD crosses.
From the original
Rates strategists Jay Barry and Amanda Berke discuss Treasury’s August refunding announcement, the implications on issuance and yield levels, alongside a discussion of more structural themes in debt management. Speakers: Jay Barry, Head of Global Rates Strategy Amanda Berke, U.S.
Related speeches
4 itemsUS Rates: Previewing the August refunding announcement
In the lead-up to the August refunding announcement, J.P. Morgan's commentary suggests potential volatility in the Treasury market, which could impact swap spreads notably. Per the full note [source], the key focus will be on how the refunding strategy pivots amidst shifting interest rate expectations, particularly as investors assess the implications for overall liquidity and market positioning. With the Treasury's increased issuance anticipated, traders should stay alert to the market's reaction, particularly in relation to changes in swap dynamics. Additionally, the absence of major US economic data releases in the near term might enhance the reactionary nature of the market in response to the refunding announcement itself.
Global Rates – And now my fears, they come to me in threes
The desk believes that the recent U.S. employment data reflects a stabilized labor market, which may limit the Federal Reserve's policy adjustments in the near term. Per the full note from J.P. Morgan, while the April payrolls report was mixed, it indicates a firming in employment growth, suggesting that the Fed is likely to maintain its current stance. With the market pricing in a flat to modestly upward sloped money market curve, the implications for dollar strength appear muted. This perspective aligns with our consensus target of 1.075 for the EUR/USD pair, as we anticipate limited catalysts for significant movement in the immediate future.
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