PremiumRefunding Preview: Rising Risk Of Treasury Sell-Off On Spike In US Funding Needs
Traders hoping for aggressive Treasury action to lower yields at Wednesday's upcoming refunding are likely to be disappointed, according to DB's Steven Zeng. Instead, the rates strategist thinks that major shifts in issuance strategy are unlikely given Treasury's strong institutional commitment to being "regular and predictable". Meanwhile, the combination of a technical upward revision to near-term borrowing and elevated expectations raises the risk of sell-off in duration and spreads, similar to what followed the last refunding announcement.
Separately, later today the Treasury will announce an updated Q3 borrowing estimate, which we expect to be around $960BN, up dramatically from May driven by post-debt ceiling TGA rebuild needs. The optics are likely negative and reminiscent of two summers ago, when yields spiked on increased borrowing concerns. Also expect an initial (and quite high) Q4 borrowing estimate of around $680BN.