On Monday, the US Treasury Department unveiled plans for a highly anticipated quarterly refunding update scheduled for this Wednesday. Investors are eagerly awaiting this announcement, which promises to reveal the extent of bond supply that the US government intends to inject into the market during the upcoming quarter. As the Federal Reserve’s influence on the market wanes after a year and a half of driving investment sentiment, the focus of investors has shifted towards a myriad of other factors and their respective impacts on stock markets.
While the third quarter earnings season has kicked off on a positive note, this hasn’t translated into significant movements in major stock averages. Simultaneously, the escalating tensions in the Middle East have dominated headlines and discussions, but their potential implications for the stock market remain shrouded in uncertainty. Against this backdrop, the US Treasury’s forthcoming announcement has emerged as a central narrative, exploring the consequences of the more than 500 basis points of interest rate hikes on the outlook of businesses and the broader economy.
The week ahead is poised to be a crucial one, with several high-impact events on the horizon. These include a Federal Reserve meeting, Apple’s earnings report, and the release of the monthly jobs report, all of which investors will closely scrutinize for their potential market implications. However, looming large over these events is Wednesday’s quarterly refunding update from the US Treasury, which promises to place a significant emphasis on yields.
Blake Gwinn, the head of rates strategy at RBC Capital Markets, believes that the heightened focus on this announcement is largely a result of the pivotal role it played in driving up yields in August. He suggests that this emphasis is not so much due to an unexpected revelation from the government but rather a reflection of the importance the market attributes to this event. Similarly, Callie Cox, an investment analyst at eToro US, highlights the significance of keeping an eye on how any news this week and in the following weeks could shape perceptions of yields among investors.
It is worth noting that the market is currently pricing in a 98% probability that the Federal Reserve will maintain interest rates at their current levels during its meeting taking place on Tuesday and Wednesday of this week. Investors have already begun to incorporate the possibility of further rate hikes in the December and January meetings. Consequently, the primary concern in the broader market is shifting from speculating about how high the Fed might raise rates to a more nuanced examination of the lingering impact of these rate hikes.
Market strategists predict that the “pain trade” stemming from the bond selloff is far from over in the short term. As a result, the paramount storyline in the financial world remains centered around the potential consequences of any breaking news on the trajectory of Treasury yields. Although the Federal Reserve’s sway over the market has subsided, investors remain vigilant for any unexpected developments as 2023 approaches its conclusion.
Source: Yahoo Finance
