The desk anticipates a cautious yet upward trajectory for US rates following the recent FOMC meeting, as discussed by J.P. Morgan's Jay Barry and Phoebe White. They emphasize the importance of upcoming economic indicators and the February refunding announcement as potential catalysts for market movement. Per the full note, the current economic landscape suggests a modest tightening bias, with inflationary pressures remaining a key focus. This aligns with our consensus target of 1.075, reflecting a nuanced view amidst varying expectations across the market.
What the desk is arguing
Jay Barry and Phoebe White of JPMorgan argue that the FOMC's recent stance and the upcoming refunding announcement are key for US rates, but they caution that weather effects may distort near-term data, urging a focus on underlying trends.
Where it sits in our coverage
We have no internal coverage on US rates or the specific currencies mentioned. Our consensus targets and spreads are not available for this topic.
How other firms see it
No other firms are cited in the source material.
Key takeaways
01JPMorgan flags weather distortions as a factor in interpreting US economic data post-FOMC.
02The February refunding announcement is a key event for rates markets.
03Focus on underlying trends rather than noisy data points.
Market implications
The podcast implies that market participants should expect volatility around data releases and the refunding announcement, with potential for rates to trade within a range as the market digests seasonal distortions.
Risks to this view
Weather effects could lead to misinterpretation of economic data, causing policy missteps or market overreaction.
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 today I'm joined by senior U.S. rate strategist, Phoebe White. We're at the end of January here, and it's been a busy month, although it feels like markets haven't gone that far in rates so far this year.
And very close to home, we're in the depths of winter. For those of you in the Northeast who have been enduring this sub-freezing stretch with snow, we hope you're surviving and staying warm. But that's not going to stop us from kind of warming up the conversation here.
So Phoebe, thanks for joining today. Yeah, good to be here. There's certainly a lot to talk about this week.
And Jay, maybe a good place to start is just on the FOMC meeting yesterday. What was your takeaway there and did it impact your view on rates or the curve? Phoebe, if I can just paraphrase Chair Powell during his press conference yesterday, I have nothing for you.
But all kidding aside, I think the Fed delivered exactly what we would have expected. Rates were held unchanged, which was broadly consensus and in the price and markets beforehand. And there were only two dissents in favor of 25 basis point eases from Governor Waller and Governor Meehan, which was completely expected as well.
It was a meeting without an SEP, so we learned very little how the committee's view on the economy had evolved over the intermediate period between mid-December and now. But on margin, the post-meeting press conference from Chair Powell was a little bit more hawkish for a few reasons. So he described the economy on firm footing entering this year, and he did argue that the outlook had improved in December.
He did describe policy as being well-positioned, and I think we knew that coming in from what had happened in December, that the days of the insurance cuts were probably coming to an end. And he did actually put into question how restrictive policy stance, the sense of policy is right now. So that was broadly in line with what we expected, and if anything, broadly in line with our forecast, which is looking for the Fed to remain on hold for the balance of this year.
So very little to impact our view on treasury yields and the curve. And over the balance of the year, we continue to expect yields to rise with the intermediate sector of the curve leading the way higher, and yields moving about 15 to 20 basis points over the balance of this year. You know, that being said, we do think that the front end should remain better anchored here, and it seems odd considering that money markets and OIS boards are pricing at approximately 45 to 50 basis points of easing over the balance of this year versus our on-hold forecast.
But we think it's just going to be challenging for the front end to release to higher yields over the near term for a couple of reasons. I think first and foremost is that even though we get a sense that the economy is on firmer footing, the reason the Fed was cutting late last year was concerns over the labor market. And certainly I think it's encouraging that the unemployment rate has declined back, but the jury is really still out on the labor markets.
I think on one hand, initial claims and continuing claims data are painting a pretty healthy picture of labor markets right here, and even ADP's weekly series on private employment growth as well. But on the flip side, as we saw earlier this week, the labor market differential from the Consumer Confidence Report from the Conference Board did show a sharp weakening in the labor market spread, and that could, if longer term correlations hold, auger for a higher unemployment rate in the next couple of months. So until we see, I think, a number of months of sustainably stable employment data with the unemployment rate remaining steady, I think it's going to be hard for markets to do anything but continue to price in easing.
And there's only a handful of basis points priced in over the next few meetings, but this is only one piece of the puzzle. The other important feature is that we've got Fed succession to consider as well. And just this afternoon in a cabinet meeting, President Trump said that he will be making his choice and announcing it within the next week.
And I think we've seen him comment on social media that the U.S. should have the lowest policy rates globally. So I think it's assumed that his presumed Fed chair will be looking to ease policy. Now, we at J.P.
Morgan firmly believe that the power of the chair does not come from a single person, but from creating consensus. And there's very little consensus on the committee right now. So we don't think a single person, a new dubious Fed chair later this year, will be able to sway the markets in that direction.
But until we see the nominee and until the new chair is actually sitting in that seat in late May, early June, we think the markets will keep that premium as well. So on balance, continue to look for higher yields, mainly intermediate sector as the Fed goes on hold, but a relatively gentle move that we're looking for here. OK, so we didn't learn a whole lot yesterday.
The Fed and the data have not done much to change our views. And for the meantime, at least, we're still just waiting on that new Fed chair to take his seat. Maybe, you know, the more important development this week, which certainly has been in focus for markets, has just been around kind of global bond market moves and the dollar move.
Last Friday, of course, it was reported that the New York Fed had conducted a rate check on dollar-yen. Then the president came out and said he wasn't concerned about the move in the dollar. We have seen some stabilization after Treasury Secretary Besant stated the U.S. is absolutely not intervening in FX markets.
But amid all this volatility, curves are steeper globally this week. The long end of the U.S. curve has underperformed versus other DM markets. And I think once again, it is sparking questions about de-dollarization.
So do you think this week's moves indicate reduced preference for dollar-denominated assets? Yeah, I think that's a great question and one we've been asked a lot this week. I think there's a few things going on at the long end.
The first and, you know, something you and I have been talking about and has been in our research in the year to date is that there have been global factors that in the first couple of weeks of the year contributed to some of the steepening moves that we saw. And most importantly, so we think they came out of Japan with that sort of mini VAR shock that we had at the super long end of the JGB curve on the anticipation that Prime Minister Taika Ichii was dissolving the government and calling a new lower house election and also that she wanted to call for a consumption tax cut for food. You know, that was meaningful because I think concerns over fiscal sustainability and fiscal expansiveness, you know, weighed on the very long end of the JGB curve.
And it may seem sort of counterintuitive to think that the tail may be wagging the dog here. But to me, it makes complete sense. I think over the last decade or so, you know, if we go back to the negative low policy rate era this time a decade ago, we had argued that low and negative policy rates were acting as an anchor to U.S. yields on top of whatever U.S. policy was doing because the relative attractiveness of dollar assets and just the reverse is happening right here.
So as policy rates have risen elsewhere, as long term yields have risen elsewhere, it really makes the dollar, the Treasury market a little bit less attractive on a local currency hedged basis for investors. So I think, you know, as the the rally in the JGB market came to a close, I think that certainly raises the specter of renewed bearishness there. And our team in Japan argues ahead of the lower house election on February 8th that there's risks of further steepening.
And then more broadly, you're right. I think with what's happened in the dollar here, you know, there's also a theme potentially of, you know, I think debasement that is being talked about out there that may be an aggressive term to talk about in the context of the dollar moving one to two percent this week. But more broadly speaking, I mean, growth expectations in the U.S. and elsewhere have been rising across the developed markets in your market and the TIPS market.
Breakevens have been widening, commodity prices have been rising, base metals have been rallying as well, all an environment that points towards growth with potentially more inflation. And if that's the case, that sort of justifies a steeper curve as well. And in fact, you know, we do think that over the near term, the risks indicate that you could see some follow through to steepening, one coming on the back of the, you know, I think range bound nature of the front end that we talked about here.
But two, because of these factors and then three, and we'll get into it when we talk about this in a few minutes. And I think there's a debt management angle as well, because people have wondered whether, you know, this action with respect to the dollar yen and GGBs will impact the Treasury Department's thinking on debt management as well. So I think there's reduced preference here, but it's a value story.
It's not necessarily a de-dollarization story. And as you and I have been arguing and our team has been arguing for the past nine months, we think there's a slow diversification away from dollar assets rather than a seminal cliff like shift in the demand for these dollar assets. That's great.
And we will talk about the refunding and debt management, but maybe before we go there, one more question for you, the CR that funded the government expires tomorrow. And at least as of the time of this recording on Thursday afternoon, it does seem likely that we're headed for another shutdown. If that happens, how would the shutdown impact the Treasury market?
And do you think it would be as long and acrimonious as the October-November 2025 shutdown? Yeah, I'm really happy that you brought this up, Phoebe, one of our favorite topics. But long story short, I think there are some factors now that would make a shutdown in the coming days look a lot different than the one that we saw in the fall.
I think first and foremost, we know that Congress has already passed, I believe, six appropriation bills, and there are six still outstanding. So it would not be a full shutdown. But nonetheless, I think what we have seen in the periods around other government shutdowns, even when they've been brief, is that the Treasury market has tended to benefit from this and we've seen Treasury yields decline, perhaps on the increased uncertainty more than anything else.
But as we look ahead, it seems like the baseline, as you said, is that we could be heading toward a shutdown if nothing is done by the weekend, particularly because this is more around Department of Homeland Security funding after everything that has happened in Minneapolis over the course of the last few weeks. But even with that, against the backdrop of what, as you said, was a very bruising shutdown in October of November last year, it doesn't seem like congressional leadership on either side of the aisle have the appetite for a long shutdown right now. And in large part, I think it's because we are in a midterm year and we are now within about nine months of those midterm elections and that this would be fresh in voters' minds the closer we get to elections.
So it seems like it could happen. Seems like markets indicate it could happen. But if it is likely to occur, it would be relatively short-lived compared to what we saw last fall.
But all in, it might be very near-term beneficial for the Treasury market and you could see a little bit of a bullish retracement on the back of that there. But I guess we'll have to see what happens over the weekend. So maybe that's a good place to pivot, Phoebe, and we kind of danced around the issue.
But I think we should really come back to the other big policy event that we're going to see announced next week, and it's the quarterly refunding announcement on Wednesday morning. So what should we expect on Wednesday morning? I think just to set the table, since the summer of 2024, the forward guidance from the Treasury Department has indicated that the current auction schedule leaves it well-financed and that it anticipates maintaining nominal coupon and FRN auction sizes for at least the next several quarters.
So with that as the backdrop, what, if anything, has changed since the November refunding in your mind on the outlook for Treasury's financing needs? And what does this mean for what to expect on Wednesday morning? Sure.
So I think what hasn't changed is our deficit projection. So we still estimate a fiscal year 26 deficit of about $1.96 trillion. What has changed since November is our projection of Fed purchases.
So the Fed, of course, concluded QT in December. It commenced reserve management purchases at a higher than expected initial pace of $40 billion per month. We expect that pace will step down to $20 billion per month in mid-April.
And the Fed also began reinvesting MBS runoff into T-bills, so that should continue at a pace of roughly $15 billion per month. So you put that all together, that should total about $490 billion of T-bill purchases over 2026. Now, even though the Fed's purchases of T-bills will be done in the secondary market, they will need to be reinvested at auction as add-ons when they mature.
So that should mechanically reduce Treasury's privately held borrowing needs by a commensurate amount. So in light of this, we still estimate that the current coupon auction calendar will leave Treasury well-positioned for this fiscal year. And as we look ahead, even with larger funding gaps emerging in fiscal year 27 and beyond, this gap should now be smaller.
So we're now estimating a funding gap of about $3.8 trillion between fiscal years 27 and 2030. And in light of this, even with upside risks to the budget deficit coming from IEPA tariff uncertainty, we now think that Treasury can wait somewhat longer before beginning a series of coupon auction size increases. So we now see those increases beginning in February of 2027 versus November 2026 previously.
And when those increases begin, we still think that they will be concentrated in twos through tens and we think they'll leave 20 and 30-year auction sizes unchanged. That's great. And yeah, it seems pretty consensus at this point that Treasury is well-financed for this year.
But I guess the next big question to ask is, this is, I think, very well known, is you had asked earlier about what was happening with the rate checks by the MUF and the New York Fed at the end of last week on dollar-yen, but also the comments from the administration with respect to intervention and the dollar. So since we published our refunding preview late last week, it seems like you and I have been getting numerous questions about this, because clearly the administration has been very focused on affordability and on bringing down long-term rates. And in the light of this discussion of dollar-yen and JGB yields and how they could act to stabilize US yields, as well as the announcement of the mortgage buying from the GSEs, that there's an increased risk here that the Treasury, in an effort to follow through on this affordability sort of theme and to bring down long-term rates, that they could take a more aggressive approach to the short and the wham of the debt in the coming refundings and potentially even next week ahead of the midterm.
So what are your thoughts on this? Yeah, I think certainly those questions are coming up. And one I've been hearing is, could Treasury actually come out and cut long-end auction sizes at this refunding?
We think that's very unlikely, especially because it would be a very significant pivot from the guidance that we heard last quarter. So last quarter, once again, we still saw that forward guidance that you mentioned, that it anticipated maintaining coupon and FRN auction sizes for at least the next several quarters. But it also included some language that the Treasury had preliminarily begun to consider future increases to coupon auction sizes.
So that indicates to us that the next adjustment to auction sizes will be an increase, not a decrease. So I think in light of that, a swift kind of 180-degree pivot would not be consistent with the Treasury's regular and predictable approach to debt management. So again, our forecast is no changes for this quarter.
And if we're right that increases aren't coming before next February, I think we'll probably just see the same forward guidance around maintaining auction sizes for at least the next several quarters. That's great, Phoebe. And I couldn't agree more with what you said, that this would really be at odds with being regular and predictable.
And if anything, and this will show my experience or my age, I still vividly remember the November refunding. Well, frankly, it was on Halloween of 2001 when the Treasury Department, without prior guidance, actually canceled the bond, the 30-year bond. And at the time, I think that was a credibility issue for the Treasury for a short period of time.
And knowing how hard it works to communicate with markets and make changes to debt management policy over a number of quarters, this would be completely at odds with that. But as we drill down a little bit further into the granularity of it, the other tool I think that has been in the press a lot and on our clients' minds a lot are buybacks. So there was a charge question given to the TVAC last summer.
There was a panel on this at the Treasury Market Conference in the fall. And now the dealer questionnaire contained a question about how to improve and make the most and optimize the buyback facility. So what did Treasury ask about?
What can we expect from changes? And then further from that, should we expect any changes to the sizing of these programs as well? Sure.
So, yes, you're right. Ahead of the meeting, Treasury asked dealers about potential operational enhancements to the program, so including the addition of yield spread bidding, the introduction of exchange operations. So we could see some technical changes explored, but we don't expect Treasury to make any significant changes to the sizes of the buyback operations next week.
And the main reason for that is, if you remember, TVAC introduced a stylized buyback score framework last August. That framework looks at a bunch of different liquidity metrics. It includes offer-to-max ratios, yield dispersions around a fitted curve, a measure of liquidity preference based on the run-off, the run spreads across maturity buckets.
And when you look across all these measures, liquidity has actually improved across most of the curve outside of maybe the very front end. But it doesn't look like increases to the program are warranted now. And then maybe as an aside, in recent refundings, you know, we're also reminded that the buyback program is not intended to be used to manage the WAM, right?
So we don't expect to see any significant changes there. We think the sizes will basically stay the same. So up to $38 billion of liquidity support purchases per quarter and cash management buybacks of up to $150 billion per year.
All right. So just to get back to our theme from the beginning of the podcast, then I have nothing for you from the refunding for next week is what you're telling me. Yeah.
Exactly. Oh, well, I mean, I think, you know, maybe we can just summarize this, you know, if you're right and given all the questions that we've been getting, if Treasury does, in fact, deliver something more in line with what you talked about, it is possible this could help the curve steepen as well. So I think we've covered a lot here in about 20 minutes.
And I think this is a good place to end it. So Phoebe, thanks for being here and for this chat today. And thank you to everyone for joining us.
Stay tuned for more episodes of At Any Rate, which is 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 2026, J.P.
Morgan Chase & Company. All rights reserved. This episode was recorded on January 29th, 2026.