The FOMC last night, as widely expected kept the Fed funds rate at a 1.0%-1.25% range. The statement following the conclusion of the meeting was little changed, and markets were relatively quiet through the release. On current growth, the committee noted that the labour market has been rising at a solid pace despite hurricane related disruptions, and added language underlying that inflation remained soft; they separated out gasoline prices which had boosted overall inflationary levels. As for the outlook, it was said to be roughly balanced and unchanged from September. New Fed Governor Quarles joined the unanimous 9-0 decision to stay put. Expectations remain that a December hike is on the way with the futures market 80% in favour of a 25bp move.
However, the longer dated US Treasury market continued its recent drop in yield which started just before October month-end. This was mainly to do with the US Treasury refunding announcement and comments from the Treasury Borrowing Advisory Committee (TBAC). Given the flattening of the yield curve there has been speculation in the market that the Treasury would consider an increased level of debt issuance at the longer-end of the curve. Treasury Secretary Mnuchin had said no such plan existed, but the market did seem to think there was some possibility it would be reconsidered.
However, last night’s Treasury comments alleviated the longer dated supply fears especially as the Federal Reserve begins tapering its balance sheet. Broadly, without pasting in the various paragraphs of their statement, while issuance will be higher next year as we all expect, the mix of maturities seems to focus on the shorter-end of the curve.
TBAC comments are just recommendations, but they appear to be in line with current Treasury thinking regarding longer dated debt being issued they said ‘Given the current fiscal outlook, the committee agreed that the Treasury should focus on increasing issuance in bills and the 2, 3, and 5 year sectors, while maintaining issuance at the longer end such that the WAM (Weighted Average Maturity) does not materially change from current levels’.
We expect a continued move lower in longer-dated yields over the coming months as the Treasury appears to have removed another obstacle to further curve flattening. Of course, inflation is the key in this outlook and remains the dominant determinant. With the Fed expected to move again in December, be it Yellen, or new front runner Powell at the helm, the US inflation environment has everyone’s close attention.