Financial News Network, October 29th (Editor Xiao Xiang) In the next ten days which decide the fate of the 'global asset pricing anchor' that we mentioned yesterday, this Wednesday seems to be a rather inconspicuous day - it's neither election day nor a Fed interest rate decision day, and even the US GDP data to be released that day seems to have a market impact that is not as significant as the PCE and non-farm data to be released in the following two days...

However, US bond traders generally see this day as the first major test of the news-driven 'ten-day key schedule' - bond selling continued on Monday, mainly due to weak demand in the two rounds of bond auctions, which in large part stems from investors feeling anxious about whether bond supply will increase further before the US Treasury announces its quarterly refinancing plan on Wednesday.

On Monday, the US Treasury conducted auctions for two-year and five-year government bonds on the same day, with unexpectedly weak demand for both. The bid-to-cover ratio for the five-year bonds was 4.138%, higher than the trading levels at the bid deadline, indicating investors were willing to buy the notes at a premium. The two-year bond auction on the same day also saw weak demand, with a bid-to-cover ratio as high as 4.13%, also above expectations.

Following the auction results, yields on various maturity US Treasuries generally rose by at least four basis points, reaching the highest levels in over two months. The benchmark 10-year Treasury yield surged by nearly 6 basis points, approaching 4.3%, the highest level since July 10th, before slightly narrowing by the end of the session.

It is certain that Monday's auction was easily affected by insufficient demand: the auction sizes for the two-year and five-year bonds were $69 billion and $70 billion, respectively, the largest monthly fixed-rate Treasury auction amounts. Similar auctions for different maturities typically take place on different trading days in the past. However, this week's three auctions - including the upcoming $44 billion 7-year Treasury bond sale on Tuesday, are more concentrated due to earlier settlement dates at month-end.

Some analysts believe that the results of Monday's US Treasury bond auctions suggest that the other four bond auctions later this week and next week may also encounter difficulties. Bond investors not only face the uncertain prospect of further Fed rate cuts, but also the risk of larger-scale bond auctions in the future.

Currently, trading activity in US Treasury options indicates that traders are inclined to hedge against the risk of greater bond selling in the market, focusing on the possibility of the 10-year Treasury yield rising to 4.5% by the end of November.

Yardeni Research President and senior economist Edward Yardeni stated in an interview on Monday that the approaching US presidential election has heightened these concerns, as both candidates have not prioritized deficit reduction.

Wednesday's refinancing plan for the quarter has become crucial.

This has also made the quarterly refinancing announcement by the US Treasury on Wednesday a key event. The announcement will disclose the sales volume of 3-year, 10-year, and 30-year bonds, as well as the issuance plan for other medium to long-term debts from November to January next week. Currently, although the industry expects that the US Treasury's bond issuance size for the next quarter will not change much compared to the current level, according to federal budget trends, further supply growth next year has been considered inevitable.

For the latest quarterly refinancing announcement, current bond traders generally expect the bond auction size to remain at $125 billion for the third consecutive quarter. One major focus of the report may be on whether the guidance for the "coming quarters" will remain unchanged. Since May, the US Treasury has consistently stated in its published guidance that it will maintain the size of note and bond auctions at least in the "coming quarters."

Jefferies Senior Economist Thomas Simons said: "The Treasury reiterating the financing path for the 'coming quarters' at this time seems to be a very important commitment. They may do so."

However, given that some US bond auction sizes, including the 10-year Treasury note, have already set records, any hints of imminent increases in sales volumes could further disrupt the US bond market, especially against the backdrop of the recent significant rise in US bond yields.

Phoebe White, Head of US Inflation Strategy at JPMorgan, stated, "If the market is accustomed to some forward-looking guidance from the Treasury and this guidance has influenced the expectations and behavior of market participants, then when we see the guidance actually change, and some wording is abandoned, it may scare the market."

Wells Fargo & Co strategist Angelo Manolatos pointed out, "We believe that the US Treasury may fine-tune their guidance on issuing notes, but will not suggest an imminent increase."

Previously, the US Department of the Treasury had already announced the estimated federal borrowing for the fourth quarter earlier this week, but the reaction of the US bond yields was not significant. In the statement, the US Department of the Treasury forecasted a net borrowing of $546 billion in October to December, lower than the $565 billion estimated in July. The Treasury's borrowing demand for this quarter decreased mainly because the cash reserves at the end of September were more than previously expected. However, this incremental amount was offset to some extent by the lower net cash flow.

It is worth mentioning that the quarterly refinancing announcement on Wednesday will be the last time the Biden administration team releases such announcement. The next quarterly refinancing plan will be introduced after the new president takes office.

Some of Trump's Republican supporters had previously publicly accused current Treasury Secretary Yellen and her deputies of relying too much on short-term Treasury bills of one year or less to suppress the issuance and yields of longer-term securities. This indicates that if the Republicans win the White House, the sale of short-term Treasury bills may be reduced, while the issuance of longer-term bonds may increase.

Simons from Jefferies stated that it is a fascinating moment right now - because this latest refinancing plan guidance comes just before the presidential election. Many things are closely related to the election results.

Editor/ping