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Brace for Impact: A Surge in U.S. Treasury Issuance May Test the Bond Market’s Limits

A not-so-subtle nudge from the Treasury Department is hinting at an impending wave that could send ripples through the bond market. As we await the Treasury’s quarterly refunding statement, expected to drop on November 1, Wall Street is already gearing up for a potential fiscal flood.

The Treasury’s bond issuance blueprint for the next quarter is no minor event. Given the previous report’s upward revisions, which echoed through the markets, causing yields to spike and prices to plummet, this next update is like waiting for the next episode of a financial thriller. The bond market’s appetite—or potential indigestion—for a fresh batch of Treasurys could dictate the tempo of financial narratives in the weeks to come.

Investor demand for Treasury bonds has shown some signs of waning just as Uncle Sam’s deficit deepens, threatening to inundate the market with an ever-increasing debt supply. In August, the Treasury Department already set the stage for what’s to come, suggesting that auction sizes will need to escalate to meet funding needs.

Josh Frost, the voice of treasury forecasts, hinted last month that we should brace for “further gradual increases in coupon auction sizes.” This is particularly relevant for the longer-dated bonds, which are a cornerstone in funding government deficits.

Wall Street’s crystal balls seem to be in sync with this prognosis. Bank of America has crunched the numbers and forecasts that U.S. overspending will balloon from $1.7 trillion in fiscal 2023 to a whopping $2 trillion by fiscal 2026. The villain in this scenario? Spiraling interest expenses on Uncle Sam’s borrowing tab.

Looking into their fiscal crystal ball, BofA anticipates that auction sizes will beef up come November, with modest but steady growth for the following half year. If the Federal Reserve hits the brakes on quantitative tightening by mid-2024, BofA analysts are envisioning around $1.34 trillion in 10-year equivalent debt supply, upping their previous estimate by $90 billion.

Not to be outdone, JPMorgan is also forecasting a Treasury issuance uptick, especially after the 2023 deficit outpaced their estimates by $100 billion. They’re eyeing a $720 billion financing gap if the Fed’s tightening persists through 2024, suggesting the Treasury may have to revisit the aggressive auction increase we saw in August.

On the flip side, Morgan Stanley is the outlier, hinting that the markets might be in for a ‘November surprise.’ They speculate the Treasury could opt for a more conservative increase, perhaps leaning more on T-bills rather than longer-term coupons to fill the coffers through 2024.

So, what does this all mean for entrepreneurs and investors? It’s a heads-up that the bond market is heading into a high tide of U.S. debt. As Treasury plans to up the ante on bond issuance, the market’s response will be critical. Will it gulp down the additional supply with gusto, or will it choke, sending yields into a frenzy?