US 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.
What the desk is arguing
J.P. Morgan anticipates that the upcoming refunding announcement will prompt significant market movements, particularly affecting Treasury yields and swap spreads. The expectation is rooted in the dynamics of increased issuance and liquidity adjustments in the market landscape.
The desk emphasizes that this announcement may correlate closely with shifts in investor sentiment, which will be pivotal as the Fed's policy direction continues to evolve in tandem with economic data releases. Along with a careful evaluation of the refunding framework, J.P. Morgan’s analysis leads to an anticipation of volatility as institutional investors recalibrate their strategies based on new information.
Where it sits in our coverage
Currently, we lack a specific internal consensus target for this analysis, rendering comparisons with industry peers unfeasible. However, it is critical to benchmark this view against evolving market sentiments.
How other firms see it
While we do not have explicit internal coverage or forecasts related to this announcement, other firms in the marketplace will likely vary in their assessments. Some may position for tightening around the refunding, while others may take a more cautious view that could lead to variance in swap markets. Firms such as bofa may present contrary positions, particularly as liquidity needs come into play.
What the calendar says
There are no scheduled high-impact events in the upcoming calendar that could influence this narrative directly, allowing the market to focus more intently on the ramifications of the August refunding announcement.
Key takeaways
01Anticipation of significant market volatility with the refunding announcement.
02Increased Treasury issuance expected to affect liquidity and swap spreads.
03Investors should stay alert to shifts in market sentiment and positioning.
04No major upcoming data releases will heighten response to the announcement.
Market implications
Traders should monitor the Treasury yields closely, particularly in relation to the levels before the refunding announcement. Shift patterns in swap spreads might indicate market sentiment and provide insights into expected liquidity changes following the announcement.
Risks to this view
The call could be reversed if there are unexpected shifts in the Fed's communication strategy or surprising economic data affecting yield perceptions. Additionally, if market liquidity tightens significantly prior to the announcement, it could dampen the anticipated volatility.
You're listening to At Any Rate, J.P. Morgan's global research podcast, where we take a look at the story behind some of the biggest trends and themes in fixed income currency and commodity markets today. My name is Jay Barry.
I'm responsible for our global developed market rate strategy here at J.P. Morgan, and welcome to our webinar today on previewing the August refunding. Now, the quarterly refunding announcement is an important event for those who follow the Treasury market, as this event helps shape market expectations for Treasury debt management over the coming quarter, but over the medium term as well.
And this is always a very important day for those of us who closely follow the Treasury market and something we love to do here at J.P. Morgan, but we've seen increased focus on this process for market participants over the last couple of years, and we thought it made sense to have a webinar today to discuss the upcoming event in more detail with perspective from some of my senior colleagues on both the research and the trading side. I'm joined by two esteemed colleagues and partners today.
First is Eric Childs, who many of you are familiar with, who runs our rates trading effort here in North America, and then also by Phoebe White, who is senior U.S. rate strategist and our lead U.S. inflation strategist. We're going to spend the next 20 to 25 minutes talking about our views on the upcoming refunding announcement, which is next Wednesday, as well as the impact on Treasury yields and the swap spread curve. We will also leave time for a brief Q&A period, and the Q&A feature will be open.
But before I begin and dig into the details on the refunding, I have one quick request. As I'm sure you all are aware, it's the most wonderful time of the year, and the annual XTEL survey, formerly known as II, the 2025 Global Fixed Income Research Survey, is open, and I'd just like to ask for your consideration in supporting us with feedback and support for J.P. Morgan in the categories that we cover in the U.S. and the global rate sphere.
Our team has worked hard this year to produce high-quality, differentiating research and insights, and by giving us your feedback, this really helps us refine the research process that we have, and we really appreciate your support in this. So without further ado, I'll dispense with that, and we'll sort of dig right in. And first, Phoebe, I'm going to turn to you.
The refunding process kicks off on Monday afternoon with the financing estimates release, and then on Wednesday morning with the actual refunding announcement itself. We published our refunding preview just yesterday evening in the U.S. Treasury Market Daily.
What should we expect from the financing estimates on Monday afternoon, and what are you looking for on Wednesday? I think the markets are keying off this sort of Fed-style forward guidance that's been in place for the last year that talks about anticipating nominal coupon and FRN auction sizes being stable for at least the next several quarters. Can you walk us through your outlook for the next week, please?
Sure. Thank you, Jay. So just starting with the Monday afternoon announcement, we think that Treasury will announce $1.087 trillion of privately held net marketable borrowing for the current quarter, $572 billion.
Last quarter, that $1.087 trillion in the current quarter is clearly much larger than what Treasury estimated just last quarter, but largely has to do with Treasury's need to rebuild its cash balance coming out of the debt ceiling resolution. So at the end of June, that cash balance was at right around $450 billion. It's even lower than that now, very well below the level that's consistent with Treasury's operating framework.
We think they want to get that cash balance back up to $850 billion by the end of this quarter and stay around that level at the end of the year. So combining that with our estimate on financing needs, this is how we arrive at our estimates for borrowing there. You know, that is a large number, but I don't think it'll be concerning to the market.
But of course, the numbers we get will help inform us on whether Treasury is, you know, assuming deficit similar to what we have in our own assumptions. And then more importantly, on Wednesday morning, when we get the full suite of announcements with more detail on their issuance plans, we think Treasury will keep coupon auction sizes unchanged for the current quarter. I think, you know, Treasury is likely to lean on T-bills to meet its financing needs in the current quarter.
You know, T-bills are typically the shock absorber that helps Treasury address those swings in the cash balance. And also, I think it's important to remember that this surge in T-bill issuance would come following a pretty heavy bill paydown period. So net bill issuance in the last four months has been about, you know, negative $528 billion.
That's come at a time when money market fund AOM has continued to grow. You know, primary dealer inventories of bills are near two-year lows. So I think the market can easily absorb a heavy T-bill issuance in the current quarter.
And we estimate about $667 billion of net T-bill issuance in this quarter. But more medium term, I think, you know, looking out over the coming years, we recognize that there's a very large funding gap that opens up in the coming years. So we project that deficits will rise above $2 trillion and sort of stay there in the coming years.
And at the same time, the borrowing capacity coming from Treasury's current coupon auction calendar is set to decline as maturities pick up. So we think that there is a funding gap between fiscal years 26 and 29 of nearly $5 trillion. So because of that, Treasury clearly can't lean on T-bills forever.
And if we kind of consider that medium term trajectory, we think that Treasury is likely to begin a multi-quarter series of coupon auction size increases in February of next year. So if we're on track for that February start, it's possible we could see a tweak to that forward guidance you mentioned. So you know, ever since February of last year, Treasury has kept this guidance saying it intends to keep nominal coupon and FRN auction sizes unchanged for at least the next several quarters.
It's possible that guidance could get watered down, perhaps dropping the term at least indicating, you know, unchanged auction sizes for the next several quarters. Thanks, Phoebe. So we're going to be watching this for funding announcement like we watch a Fed policy statement.
Maybe if I can pivot to you now, Eric. So how do you think the rates markets are priced for this sort of outcome? And what do you see in investor positioning through the lens of our franchise and duration and curve and swap spreads heading into next week's event?
How much do you think of this as actually tied to the refunding itself and the debt management strategy outlook versus the broader outlook for monetary policy, say? Sure. Thanks, Jay.
So I think for the supply this year, I think the market is pretty well set up for the TDA rebuild that sort of starting and the supply that's going to come really in earnest kind of next month. So I think thinking about sort of valuations in the front end, you know, asset swaps kind of screen a little bit cheap. It seems like they're discounting a little bit of that supply.
So I think for the front end, I think it's not really much of a sort of big deal, at least in the short run. I think more broadly positioning, you know, positioning as a whole in U.S. rates is kind of on the lighter side. We've been pretty range bound for a while, but if you kind of break it down, I would say there's sort of two amps, one of which is going to be very keyed on what happens next week and one of which probably doesn't mean that much.
I think on the macro side, I think duration positioning is a little bit long, but if you look at our surveys, it's kind of on average, you know, it's not too off sides. I think most of that looks like a long kind of in the belly of the curve, call it like a roughly an index duration. I think on the curve, the curve positioning is definitely heavier, but it's very similar.
It's sort of longs in the belly and the shorts are really all on the long end of the curve. I think it depends on the account base. But I would say at the margin, the the sort of real money and real money sort of state of the world, it generally has that in sort of a benchmark tilt, primarily in futures, whereas a lot of the macro hedge fund universe has it really more in swaps.
But at the market, it's very much a back end steeper with the longs anchored in anywhere from fives to tens. I think where where it's more tactical and where there's going to be sort of more interest is going to be on the relative value fund positioning. And I think coming into the month, you know, there was a big focus on carry and recovery and asset swap levels from the movements in the spring.
I think most of the long sat in kind of the belly of the curve, both outright and then to the extent positions were gross towards in the back end. And I think the the reconciliation process probably happened a little bit quicker than markets were expecting. And so the last.
The last couple of weeks have really been about setting up for this supply, so I think that's pretty well set up for and then looking ahead to QRA. And I think at the margin, what most people have is there's a lot of consensus around some sort of way of shortening, you know, pace and structure kind of there's a lot of variation there. But, you know, at the margin, people are sort of long.
Some some asset swaps in the back end, you know, against kind of some shorts in the front end waiting for the supply. Thanks for that, Eric, so I guess we could think that perhaps the long and asset swap position and the curve position are at odds, but they're for kind of completely different reasons, like the spread position for that outcome than anything else. Yeah, I think the macro positioning probably doesn't do much, barring something kind of really outsized.
It's really the tactical RV positioning, which will be moving. Thanks for that. Now, if I can kind of turn it back to you, and I think this is a good segue as well.
You know, you both talked about how it's easy to see that Treasury should be on hold with coupon option sizes through this year. And we think that the next round of increases begins in early 26. But we've made some tweaks to the forecast with the refunding preview that we published last night.
And we've now argued that long end option sizes should hold unchanged, even as coupon size increases become as they come to fruition early next year. So can you guide us through the rationale behind that? And then the other thing I think that's really important for everyone who's watching and listening right now is, what's the risk of Treasury allowing the T-bill share to continue to rise here?
So if you can walk us through that, that'd be great. Sure. I think that sort of T-bill share objective and also the wham and kind of where demand is along the curve have really kind of fed into our thinking here about what Treasury will do in the coming quarters.
And maybe I'll just start with you, Eric, because I And maybe I'll just take that T-bill share question first, because the first natural question is, what would happen if Treasury just relied solely on T-bills for the next few years? And we estimate that in that scenario, the T-bill share would creep up towards 28% just by the end of 2028. For context, Treasury has rarely allowed that T-bill share to cross above 25% in the last few decades.
And it makes sense because a higher T-bill share does come with trade-offs. And Treasury actually did, well, TBAC did a formal study and a charge question just last year on this question and identified that a higher T-bill share comes with increased volatility and deficit financing, increased rollover risk. And it also means that Treasury would have to hold a higher cash balance to protect against a loss of market access.
So as a result of that full study, TBAC slightly adjusted their guidance on that optimal T-bill share, but argued that Treasury should aim to hold a T-bill share of about 20% on average. That was a slight tweak from the former guidance, which was the 15 to 20% range. And I think in this environment, it does make sense to allow for some flexibility above that 20% target, especially in the light of potentially strong bill demand heading into next year.
We do think money market fund AUMs will continue to grow over time. We also think that once QT comes to an end, which we think will happen at the end of the first quarter of next year, that the Fed will reinvest mortgage paydowns back into T-bills. And then lastly, there's the question of stable coins, which could add some marginal demand as well.
I think all those things do argue for some flexibility to move slightly above 20%. But we are already sitting with a T-bill share above 20%. It's been around 21% to 22% over the last year.
We think we'll end this year at a 22% share. And again, looking out at that funding gap in the coming years, I think it still argues for Treasury moving forward with coupon auction sizes early next year. That then leaves the question of where along the curve should Treasury be funding?
And on this question, I think there are two important considerations. One, first and foremost, just thinking about demand. We do see clear evidence that duration demand, especially at the long end of the curve, has been slowing this year.
So you can look at stripping activity, for example. And if you look back at stripping activity on average in 2023 to 2024, that strips demand represented close to 30% of the average gross supply coming in 20- and 30-year Treasuries. We have seen pretty significant slowing year-to-date.
That's dropped to about 20%. We think that has come as defined benefit pension funds have already completed a lot of their de-risking activity and their reallocation into fixed income. So we think demand at the long end will stay slower over time.
Of course, this is a global trend where we have seen reduced demand for long-duration assets. And then just in that context, I think Treasury can also look to its formal debt optimization framework. Brookings released a paper back in 2018.
There was an updated paper released earlier this year. But in that framework, there are a couple of macroeconomic factors that feed into what is the optimal weighted average maturity of the debt and where should Treasury be funding on the curve. And in that framework, a higher term premium argues for more issuance in bills and structurally higher deficits argues for more issuance in the belly relative to both bills on the long end.
So you put all of this together, and I think Treasury can clearly justify holding those 20 and 30 year auction sizes unchanged while leaning more on front end and belly issuance. So just a quick follow on then. So given that new forecast, coupon increases begin in February.
Those increases are focused at the short end and the intermediate sector and not at the long end. The baseline WAM of the Treasury market is about 72 months right now. Where do you see it as you head into 2026 and beyond?
Right. Good point. So I think it will be a very gradual, slow shortening.
We see it just getting down to 68 months at the end of 2028. Thanks, Phoebe. And now, Eric, I'm going to pivot this back to you because you've written extensively on this and you publish your own deep dive into the WAM of Treasury's debt and what you think is priced into the rates and the spread curve.
You argue that macro financial conditions and that debt management strategy considerations can on its own explain a fair amount of the variation in the asset swap spread curve over the last few years. So what do you find in that analysis? What's the impact of changes in WAM for spread valuations?
And then you've also said that there's room for the WAM to decline over time. What do you think the tolerance that we've got for that in the markets? Yeah.
So thanks, Eric. So, you know, your salespeople can refer you to this note if you didn't read it. But basically, it is kind of amazing with a simple two factor model.
So one, basically the WAM of the outstanding stock of debt and two, kind of a proxy for financial conditions. We just use long and kind of real yields. You can really disaggregate the impacts of fiscal policy and monetary policy.
And what we found is, you know, looking at, say, two thirties or five thirties spread curve, you know, those two variables explain over 80 percent of the variation over the last five or six years. You know, over the last five or six years, about a third of the move was really driven by, you know, steepening and back end spreads is really driven by WAM extension in twenty three and early twenty four. And then the remaining two thirds were dictated by the Fed's balance sheet runoff and raising rates.
So like as you walk forward, I think you have a couple of impacts. I think, you know, I agree very much with Phoebe on sort of what the magnitude of a reduction probably looks like also around what the pace looks like. And so if we end up in a place where we're, you know, call it four to five months shorter, we find that for every month of WAM shortening, that's worth about a basis point in, say, a two thirties spread curve.
So let's just call that a four to five bips, you know, over the course of, say, you know, 12 to 18 months. And then if you follow the sort of rate path, if you follow the forward curve along rates, you know, you end up with about four to five basis points of of richening and back end treasuries as well from easier financial conditions going forward. So if you put that all together, plus with valuations a little bit cheap in the back end.
So, you know, there's a little bit of a risk premium there. You end up with a place where, you know, a year from now, the spread curve probably should be about 10 bips kind of richer than it is in the back end. Now, the thing is, is if you if you walk through the forward curve, that's basically what's kind of priced in there.
So really, it's it's hard. You know, in the short run, we can definitely richen up if we get some sort of outcome that that the market views as positive for the long end. But again, what ends up happening is over time as this new supply comes to the market, the market needs to concede for it.
And you sort of just walk along the forward curve. So, you know, in our mind, the way that we like sort of structuring to play for it is to own some stuff in the back end, but actually, you know, more barbell against, you know, waiting for bigger supply really next year, kind of in the belly of the curve. Thanks for that, Eric.
So, yeah, kind of a transition from overpricing term premium is a long end to it being underpriced in a relative sense in the belly. I think it's fascinating for me hearing you talk and hearing Phoebe talk that we're both sort of coming to a similar similar conclusion, but from slightly different angles there. So that's encouraging from my perspective.
And I think it's fascinating that you both think that there's reasons for the wham to adjust shorter. To me, as I take a step back with a global purview, it's notable that this is just not a U.S. dynamic as well, that we're seeing a deterioration in the supply demand balance for longer duration assets across government markets globally. I think most of us know this has been most acute in Japan, where BOJ QT is running faster than elsewhere globally.
And that lifer demand for longer duration JGB assets has faded. So we did have the very large step that the Ministry of Finance took about a month ago now, where it made cuts to long end JGB issuance to the tune of about, I think, 400 billion yen per month in the 10 to 40 year sector of the curve. We've seen it in the U.K. as well, where it's been cutting its proportion of long end issuance and now it represents just a 10% share of global, of gilt issuance, excuse me, down from something like 30% about three years ago.
And then finally, I think we're on the verge of this in the euro area well, where it seems like just as much as everyone's focused on bank reg reform and swap spreads in the U.S., everyone in Europe is focused on Dutch pension fund reform and the slope of the curve. Whereas the Dutch pension fund community moves from defined benefit to defined contribution, that's probably going to bring with it less demand for longer duration assets as well. So it's all moving in the same direction.
But if I can ask you both, despite these other steps from other DM debt management offices, what I notice is that long end yields in Japan and in the U.K. and here in the U.S. remain near their cycle highs. What do you think's driving this dynamic even after these actions globally and in the U.S. as well? So maybe I'll just start.
And I think it's a good point. I think there's been this structural shift towards higher term premium everywhere. And that is coming against a backdrop of these big shifts in the demand story.
I think in the U.S. what we can see is if you look at the Fed's 10-year ACM term premium estimate, for example, that is about, call it 175 basis points higher just in the last couple of years. It's back to levels that we saw on average in the decade prior to the GFC. And I think there's a number of factors driving that.
And I think these modest tweaks we're talking about in terms of issuance composition into next year, especially in the U.S., won't be enough to necessarily stem that structural trend towards higher term premium. So for one, I think at higher levels of the policy rate and higher yields generally, that means higher uncertainty and volatility, which justifies higher term premium. And then on the demand side, obviously, QT is still ongoing, albeit at a slower pace.
But we have seen the overall Fed balance sheet as a share of GDP shrink from somewhere around 35 percent a few years ago, down closer to 20 percent. That is re-injecting term premium back in the curve. And then away from that, we've been talking a lot about foreign demand.
But I think that's an important piece of the structural story here as well, that we have been seeing in particular reduced demand for treasuries from foreign official investors. We've been seeing reserve managers reallocating, essentially diversifying away from treasuries. And that's an ongoing trend as well.
So I think these are some of the key factors we've been pointing to that continue to point to a higher term premium over time. That's been an important part of our view on the treasury yield curve going forward. And so we think that long end yields will stay anchored near current levels through the second half of the year, even if the Fed begins cutting policy rates in the second half, as we project.
Great, Phoebe. Eric, anything else to add or any differentiating? Yeah, I'd say in the short run, well, I think there's two things.
One is the short run and one is the long run. And I think in the short run, with the exception of the Bank of Japan, you do have fairly asymmetric central bank reaction functions against the backdrop where you are structurally changing basically the system for capital for savings and investment globally, meaning the idea of recycled dollars like de-dollarization and all this. I think if you actually take a step back, you kind of go, the market is basically, in my mind, feels very comfortable with the steepener given the asymmetric reaction functions.
Ball has been quite low and declining. We've basically been sitting with the exception of sort of what's been going on in the Bank of Japan. Rates have really not been moving.
And so convexity is for sale everywhere. And so if I think about dollars specifically, your sources of sort of excess return are either short-dated asset swaps, selling of all, or some form of curve steepener, convexity selling, usually belly to long end. And that trade has worked in kind of a straight line.
And so it's really, really been a good trade for a lot of people when there's not a lot of stuff going on. So in the short run, I think that's a big part of it. And in the long run, we have to kind of figure out where public sector debt now is sort of going to go up everywhere, where the clearing level is going to be.
And also, you know, how credible is some of this wham shortening going to be? If you don't think it's that credible, if you think that over time, DMOs will have to re-extend, well, then you don't really want to go buying a bunch of backend, even if you think that in the short run, their supply is going to be a little bit smaller than it was. Something that appears much more like an EM management strategy than a DM strategy right there.
To some extent. Yeah. Yeah, that's great.
Thanks. I know we're running short on the time here. And we have had some questions come in.
So Phoebe, let me ask you this question. We've covered a lot of ground here on what to expect from next Monday and next Wednesday. A few folks have asked about the primary dealer questionnaire from the Treasury Department about T-bill issuance, post debt ceiling, which I think you've touched on, but also on the buyback program.
Can you elaborate on what was asked about there, please? Sure. So, yeah, there were two questions in the questionnaire.
The first asking about T-bill issuance. I think I touched on this at the start in terms of the market's capacity to absorb a surge in issuance this quarter. We think the market is well positioned.
But turning to the second question, Treasury did ask dealers to provide input on a range of possible enhancements to the buyback program. And we could see Treasury explore some of those options at the upcoming refunding. For example, we think there are arguments for increasing the program size, just if you look at the growth in primary dealer inventories of off-the-run treasuries, for example, with the growth in the market.
But I think any changes would be marginal. And I think the important point to make here is any enhancements to the program we think would be made in order to achieve their liquidity support and cash management goals, right? We don't think that the buyback program is intended to be an active tool in Treasury's broader debt management framework.
And I think here I'd highlight the quote from the TBAC report to the Treasury Secretary at the last refunding, where the committee stated that it is important to essentially manage any adjustments to WAM with issuance, right? So I think we just need to remember the original objectives of this program and what it is intended to do. That's great.
Thanks for that. So if we can, moderator, if you can just open it up for questions here. I realize we have just a couple of minutes left, but we're willing to take questions right now.
Thank you. For today's webinar, we will be utilizing the raised hand feature for Q&A. If you're on a computer, this can be found at the bottom of your Zoom app as a raised hand icon or by clicking the reactions button.
And if you're on a mobile device using the app, simply tap the three dots or more buttons to find the raised hand feature. And lastly, if you're calling in today, star 9 will activate the raised hand and then use star 6 to mute and unmute. Okay, it doesn't appear that anyone is raising their hands at this time.
Oh, there we have one. We have a question from Eric Schiller. Eric, if you could please unmute your line and ask your question.
Thanks for the perspective, guys. Just a quick question. Have you accounted for tariff revenues at all in your deficit and funding needs and consequently auction size forecast?
Yes, we have. Yeah, we've incorporated roughly $350 billion of tariff revenue per year in our deficit projections over the next two years. So that's incorporated as we're thinking about funding needs.
Thank you. Okay, it doesn't appear we have any further questions at this time. Okay, well, if that's the case, then we're going to end basically right on time.
And this seems like a good time to wrap up. So first, thank you to everyone who was able to dial in today. We really appreciate you spending the time with us.
And then also thanks to my partners, Eric and Phoebe for their insights as well. If there are any other questions that come up in the interim, please don't hesitate to reach out. You should probably know how to get a hold of any of us.
So thanks so much and have a great day. Stay tuned for more episodes of At Any Rate, J.P. Morgan's global research podcast series.
This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information including important disclosures.
Copyright 2025 J.P. Morgan Chase & Co., all rights reserved. This episode was recorded on July 22, 2025.