The Bank of Japan (BoJ) decided to keep interest rates unchanged. They also redefined the 1% limit on the 10-year JGBP yield as a loose ‘upper bound’, while eliminating their promise to maintain that level. However, the market was expecting a more aggressive move, causing the yen to fall. Japanese policymakers emphasized that they are prepared to implement further easing measures if necessary, which dampened sentiment. Following the BoJ decision, the USDJPY is trading just above 150, despite the spike in the 10-year JGB yield to almost 1%, which should have pulled the pair lower. This is particularly notable considering the news that the US Treasury will be borrowing less money in the last three months of this year.
The US Treasury plans to reduce borrowing; no immediate change in Fed rates
The US Treasury Department announced that they have plans to borrow around $776 billion in the last quarter of the year. While this is still a historically high amount, it is below the expected $800 billion and well below the $1 trillion borrowed in the July-to-September period, which caused turmoil in the US bond market and led to a rally in the long-end of the US yield curve.
Today marks the start of the Federal Reserve’s two-day policy meeting. While the FOMC announcement on interest rates is typically a significant event for investors, this time it will not be the only highlight of the week. It is widely expected that there will be no rate hikes this week, with the probability of no change being almost 100% certain. Although the strength of recent economic data, increase in inflation, and global uncertainty have raised eyebrows among Fed members, they are not expected to raise rates. Therefore, what they say they will do will have a greater impact on market pricing than their actual actions. Rate expectations for the December and January meetings, both of which also suggest no rate hike, will be the focus. These expectations could change, but for now, investors are betting on no further rate hike.
In the absence of a surprise rate decision or unexpected forward guidance on rates, the US debt situation and the Treasury Department’s quarterly announcement on bond details will be crucial for the US sovereign space and the fate of US yields. The composition of the US Treasury’s bond issuances will be of particular importance. Shifting towards shorter maturity debt may alleviate pressure on long-term US papers, but the issue is that the US Treasury has already sold a significant amount of short-term bills, coming close to their self-imposed limit of 20% last quarter. This is why they decided to sell more longer maturity bonds since September, resulting in higher long-term yields. Therefore, it is uncertain whether the Treasury’s issuance calendar will completely calm bond investors’ nerves on Wednesday.
