US Rates: See you next (fiscal) year
Per the full note , 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.
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.
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.
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.
Risks to this view
The call is invalidated if the Treasury signals a larger-than-expected increase in issuance in the upcoming quarterly refunding announcements, or if demand from foreign and domestic buyers unexpectedly wanes. Additionally, a surprise uptick in inflation data could force the Fed to adopt a more hawkish stance, undermining the rate stability that underpins this view.
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. I'm your host, Jay Barry, head of global rate strategy at J.P.
Morgan, and I'm joined today by Amanda Burke, U.S. rate strategist. Welcome, Amanda. Thanks for having me, Jay.
Anytime. So the focus for markets last week was clearly monetary, given the sheer volume of central bank decisions we had across the DM. And perhaps the U.S. was the most meaningful, given Chair Warsh's press conference.
However, this week, the focus has shifted markedly in rates markets to geopolitics, of course, given that it appears that we are seeing some de-escalation in the Middle East and oil prices have fallen meaningfully. And it's also moved to fiscal, with the coordinated Japanese and U.S. intervention on the yen late last week and early this week. And then yesterday's quarterly refunding announcement.
And just for all of our listeners, we're recording this on Thursday, August 6th, prior to the release of the July employment data. So we thought this would be a good opportunity to pivot the conversation from monetary to fiscal and really dive into what we learned from the August refunding announcement yesterday. So Amanda, you've done a lot of work on Treasury supply and we're kind of sitting here influential in our issuance forecast.
So what did we learn from the refunding announcement this week that Treasury gave us yesterday morning? Yeah. So the first things first is that the coupon auction sizes were left unchanged.
Now, we expected that consensus expected that. The bigger question coming into this announcement was what would happen to forward guidance? There's a line in Treasury's forward guidance that they expect to maintain current coupon auction sizes for at least the next several quarters.
We had focused a lot of our attention, market had focused a lot of their attention on whether that at least might be removed. And we see a pretty sizable funding gap opening up in fiscal year 2027 and really in fiscal year 2028 and beyond. And in the past, TBAC has remained convinced that the next move in issuance sizes changes would be increases potentially coming in 2027.
So we expected that in advance of that, that at least may be removed. Now, that at least was left unchanged. But interestingly, we did see a small tweak in a different section of the forward guidance.
Treasury does say in that forward guidance that they will continue to evaluate potential future changes to nominal coupon and EFRA and auction sizes. Interestingly, that read in the prior announcement, potential future increases. So we think that that's somewhat curious in the context of those funding gaps that I mentioned earlier.
So we had sort of focused on that. There were also some other tidbits that were in that announcement. Specifically, we had been somewhat surprised about the financing estimates that were released on Monday.
At that time, Treasury said that they had expected an $850 billion TGA level at the end of the year. We were somewhat surprised by that. We were coming into it expecting $950 billion, which is what they expect for the end of the current quarter.
We did get a bit of clarification on that point, that that was a timing of cash flows issue about the fact that at this time, the year end will fall on a Thursday. So some of the cash flows that might go out in the next calendar year will go out in this calendar year. And we did see some clarification that also that TBAC recommends that going forward, perhaps we get more clarification and context around those numbers on the financing estimates.
Yeah, I think on the latter point, that's an important one because we were certainly, as you said, Amanda, a little bit confused on Monday afternoon. Retrospectively, we should have dug in a little bit more to understand that given the year end calendar, that that probably influenced that and the spot look is probably much lower on TGA than you'd probably expect in even the days prior. But on the former topic, I think your discussion of the small tweak to the guidance and changing increases to changes is really meaningful.
And I guess there's probably two ways we can interpret this. And the first is, is that Treasury has clearly spent a lot of time evaluating demand recently. There was a charge question earlier this year, I believe back in February, which looked at the contours of Treasury demand and how there is more demand for short end securities and intermediate securities at the expense of the long end.
And I don't think that's at all at odds with the work that we have done, that there's been this US trend towards reduced LDI demand for longer duration securities. And that this is not just a US story, but it's global as well, because we've seen the same thing happen in the UK. We've seen it in spades in Japan.
We've seen it and we're seeing it in the euro area as well. You know, however, that being said, I think there's also been some work done on Treasury's optimal debt model. And looking at that, that certainly indicates that there should be from a pure optimization perspective potential some changes going forward, because while Treasury is issuing along the efficient frontier right now, that efficient frontier is an outcome that works only if we have a productivity boom.
And I'm cognizant that this morning's productivity data for the last two quarters were both very strong, but that the event you have a different set of economic outcomes, it may make sense to issue less at the long end, but also less at the short end. So I think, you know, there is a reason to be seeing that maybe they're creating more flexibility around that. But if that's the case, then why is the T-bill share increasing further?
And I think you'll go into more detail about that later. So the other read through is that market developments have made the Treasury Department a little bit less comfortable with what's happened with rate levels. And we know the administration, and in particular, Secretary Besant, have been focused on lowering long term rates.
And at least early in the Trump administration, that was coming to fruition. And a large reason that came to fruition is because markets were pricing an easier Fed policy. And that was sort of resoundingly obvious earlier this year as markets were pricing in a Fed funds rate that was, or pricing into money markets and expectation that the Fed funds rate would fall something like 75 basis points this year.
But now that's all been unwound. And as that's unwound, we've now swung to pricing in something like 45 basis points of hikes. And that's rippled through the rest of the term structure, moving rates across the curve higher.
Moreover, I think we would argue that, and we did in our daily and weekly last week, that Chair Warsh's press conference was a little bit ambiguous on the inflation target. And if it displays reduced market comfort with the inflation target that the Fed's got, that could result in higher inflation expectations and higher long-end yields. So perhaps this change in guidance is trying to show some sort of two-sided distribution, which takes some of the bearish pressure off yields.
And in fact, I think we'd argue that you can see that linked elsewhere, particularly with the coordinated intervention that happened in yen. Secretary Besant has made the point in the past that he thinks excessive volatility in dollar-yen creates excessive volatility at the long end of the JGB curve, which filters through to treasuries. And we would agree, because when we look at our curve models, we can see that long-end JGB yields have played a statistically significant role in the partial steepening of the curve over the course of the last number of months.
And yes, the curve is broadly flattened. It's just not as flattened as much as we would have expected. And we think the partial driver right there is that long-end JGB yields have been climbing.
So if this move in dollar-yen has been really about BOJ credibility and the notion that the BOJ is behind the curve, and because the BOJ is behind the curve and keeping real short rates negative, that's steepening out the long end. That has a filter through to the long end of the U.S. curve as well, and we think it's impactful because a decade ago, low and negative policy rates in Japan made treasuries look attractive on a currency hedge basis to Japanese-funded investors. Now just the opposite is true, so I can see why the combination of these factors are aimed at stabilizing long-term rates more than anything else.
Nevertheless, and you've said it, I think the medium-term outlet suggests that as we move into fiscal 27 and beyond, you've got a funding gap that opens up, and this is going to necessitate some increase to coupon auction sizes over time. It's just the timing of those seem less clear right now. So we've been sort of shading this in the direction and highlighting the risk for a number of months right now, but given this new guidance, I think it's hard to expect that the Treasury is going to fully remove this forward guidance at all this year.
So now because of that and knowing that we need a number of quarters before that, between the guidance change and the increase in coupon auction sizes, we're pushing out our forecasted coupon issuance increases from February of next year out to August, so a six-month extension as we wrote about last night or daily. So with that, Amanda, by moving these coupon issuance forecasts six months out, that's got to change the dynamics about our split between coupon issuance and bill issuance for next year. So would you like to walk us through that and how we expect the T-bill share of marketable debt to evolve next year?
Yeah. I mean, a later start to coupon auction size increases in the context of those funding gaps naturally increase reliance on T-bill issuance next year. So in the context of both pushing back this start and our baseline and also the updated TGA guidance, which changes the timing slightly as well, we now project about $2.054 trillion in net privately held borrowing in 2026 and $2.191 trillion in 2027, to get precise about it.
So that translates to something, a net change in privately held T-bills outstanding of $330 billion in this calendar year and $790 billion in calendar year 2027. And that's net of Fed purchases and buyback assumptions. This, as I mentioned, will amount to an increased bill share of total debt outstanding.
So we see that reaching 24% by the end of the year in 2027 and all the way to 25% by the end of the year in 2028. So for everyone on listening right now, that's up from something like 21.5% to 22% right now. So it's a two percentage point increase or something like that, right?
Yeah. Yeah. Perfect.
So that covers a lot of the nitty gritty about debt management strategy over the near term. Away from those decisions, was there anything else we learned from Treasury, Amanda? So markets have been, I think, on heightened awareness that the May refunding introduced some likelihood that perhaps the Treasury Department would look to free up some of the cash it's got on the Fed's balance sheet and its TGA, potentially invest some of that into the repo markets.
There was a follow-up question that came in the dealer questionnaire, which I think raised the sensitivity for market participants that they could be moving quickly. What did we learn on that? And what would you like to share on that front?
Yeah. So we saw some discussion of this, which, as you mentioned, was expected considering we got a follow-up question on the dealer questionnaire. In that case, there are pretty mixed views.
Most primary dealers were optimistic that in the right design and construction, this type of program would modestly ease funding constraints, increase intermediation capacity, and potentially improve the market's ability to absorb additional Treasury securities. But we want to caution that the actual practice of this type of strategy is very far from straightforward. There are a lot of operational questions that exist that are still to be answered, which I mean, clearing, execution format, counterparty selection, documentation, there are a lot of questions on this front that we have not had answers to and would take time to figure out the details of.
And on top of that, we had work on this done in a charge in a last quarterly funding announcement that we got in May. And the presenter of that charge question on this topic noted that the economic value is different in different reserve regimes. So it's positive when reserves are scarce, modestly positive when reserves are ample and negative in abundant reserve environments.
So there's an inconsistent benefit of this type of approach. And overall, we think that there's really only a marginal benefit to this strategy of investing excess cash in overnight repo. And the scale of the benefit that we're talking about, it's not particularly compelling relative to the challenges and all of those operational details that one would need to hammer out.
No, that's a great point. So it seems like there's still more study to be done, both on implementation and operations that we could see that, I mean, potentially as early as November, but that this is not being rolled out immediately. So thanks for that.
And finally, because you've been so thorough so far, what about the charge questions? What were the charge questions for this quarter and does it give us any insight in anything in any respect on debt management strategy right now? Not too much on debt management strategy.
I would say both for really treasury market structural updates. The first charge related to transparency of secondary market transactions. Now there have been a lot of developments on this front.
This is building on work in a charge that was done in November of 2022, same topic. In that interim period, we've seen transparency efforts ramp up, but they've really been focused on on the run securities and some other small changes that have been made. The presenting member in this case highlighted some benefits of additional strategies that could be taken on transparency sake and went through some drawbacks and pros of increasing transparency in different sectors of the market.
On that point, the presenter suggested that there could potentially be some benefits to expanding transparency in aggregate and transaction level data for T-bills and for CTD into futures contracts for author insecurities. But one sort of warranted caution in trying to increase transparency in the less liquid sectors of the market. And we would generally agree there that there's a differentiation in liquidity characteristics across different segments of the market.
And that really that really augers for differing approaches for each product. So we see the benefits to what the presenter was suggesting, but we think we would also warrant caution in more deeply off the run securities, less liquid parts of the market like tips. The second charge question was on intraday repo market.
It was sort of a high level discussion on developments of the market and what we've seen recently. And there, the presenter concluded that the intraday repo market could offer sort of an avenue to deploy some some idle excess cash balances, and it could be attractive to banks considering under current regulations, intraday repo is generally not captured in end of day balance sheet liquidity or risk exposure metrics. But the size of the market, we want to we want to caution the size of the market is quite small.
The presenter did talk about potential ceilings, but there are a range of estimates on what the demand for this kind of market might be. And there was no firm agreement on what that might look like going forward. So no, nothing from there was really giving us any insights on debt management strategy, but they were both sort of talking more broadly about market structure in general.
Yeah, and that kind of makes sense, because really very little has changed quarter over quarter with respect to the fiscal outlook. So I think it's it's all sensible that the Treasury use this as an opportunity to move the ball forward on some longer term developments more than anything that's near term in nature. So that was a pretty thorough description and dive into the August refunding.
So Amanda, thanks for that. Just to recap for everyone, because there was no guidance change and because there was that small tweak from increases to changes, we pushed out our expected timing of coupon increases from February of 27 out to August of 27. We continue to expect those increases to mainly be focused in the short intermediate sector of the curve because of the reduced demand for long end securities that we've talked about.
And we think it's unlikely that the guidance will change at the next refunding in November as well. So I think this is a perfect opportunity to close out the podcast. So leave it there.
Let's leave it there. Amanda, thanks for joining. To our listeners, thank you for listening today and stay tuned for more episodes of At Any Rate, J.P.
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This episode was recorded on August 6th, 2026.
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