Bond Market Trends: The Treasury's Quarterly Refunding Announcement | Episode 065 | 11-01-23

In this episode of "Markets with Megan," Megan Horneman, Chief Investment Officer at Verdence Capital Advisors, discusses recent developments in the bond market. She highlights that the Treasury's quarterly refunding announcement, where they reduced issuance from an expected $114 billion to $112 billion for the quarter. This decision caused a market rally as it lowered the 10-year note and 30-year bond issuance while keeping the 20-year issuance unchanged. Megan states that, although this news has led to lower yields, it's essential to consider the broader context. The Treasury is still issuing a significant amount of debt to fund the deficit, and the Federal Reserve, the largest holder of Treasury bonds, is reducing its balance sheet, potentially leading to upward pressure on yields in the future.

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today with our regular segment of Markets with Megan, and I want to talk a little bit about what's going on in the bond market today. We've seen a pretty big rally in bonds, so that means yields are down and prices are up. And let's just kind of dig into what's going on and why. First of all, the Treasury announced their issuance for the upcoming quarter. This is their quarterly refunding announcement and normally this means absolutely nothing to anybody but bond traders. It doesn't move the market. It's just a regular quarterly announcement that they make so that we understand how much debt will be issued in that quarter. But in August, the Treasury came out and actually announced a pretty big increase in what they were going to be issuing on a quarterly basis, and this spooked bond investors. This is when we started to see that yields in the long end of the Treasury curve started to move higher in anticipation of this increase in supply. Well, today they came out with that quarterly announcement and instead of $114 billion worth of bonds being issued this quarter, which was what was expected, they're going to issue $112 billion worth of issuance. The markets rallying on this news, they decided that they would reduce their 10-year note and 30-year bond issuance by a slight amount and keep the 20-year unchanged from the prior quarter. But you know, bond investors like this. They like the fact that there's less supply.

I just want to put this in perspective. Let's be honest. This is $112 billion in one quarter compared to $114 billion, and we're seeing the 10-year Treasury yield down about 13 basis points on the day just on that news. I think that that's a little bit optimistic. Let's keep in mind that the Treasury is issuing a substantial amount of debt to fund our deficit and the biggest holder of Treasury bonds, which is the Federal Reserve, is reducing their balance sheet. So I think this is probably just a little bit of a knee-jerk reaction. We still think that there's probably some upward pressure that you'll see in yields in the coming months. We're a little bit cautious that the investors took this with such positivity today. This report that's all I have today about the refunding announcement. If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you.