The Bank of Japan (BoJ) decided to keep interest rates the same and changed the 1% limit on the JGBP yield to be seen as a flexible “upper bound”. They also abandoned their previous commitment to maintaining that level. Unfortunately, the market had expected a more aggressive action by the BoJ, causing the value of the yen to drop. The Japanese policymakers’ statement that they are prepared to implement additional easing measures “if needed” further dampened sentiment. The trades remained slightly above 150 this morning after the BoJ’s decision, even though the spike in the 10-year JGB yield to nearly 1% should have pushed the pair lower — especially after the news that the US Treasury plans to borrow less money in the final quarter of this year.

The borrowing amount by the US Treasury will decrease, while it is anticipated that the Federal Reserve will not make any announcements regarding any changes.

Yesterday, the US Treasury Department announced their intention to borrow approximately $776 billion in the last quarter of the year. Although this borrowing amount is still quite high compared to historical levels, it is lower than the anticipated $800 billion and significantly lower than the $1 trillion borrowed during the period from July to September. This previous borrowing had caused significant disruption in the US bond market, particularly precipitating a strong rally in long-term US yield curve.

Today, the Federal Reserve (Fed) begins its two-day policy meeting. Although the announcement on interest rates by the FOMC is typically significant for investors, this time it will not be the only important event of the week. This is because it is widely expected that there will be no rate increases this week, with nearly 100% certainty priced in. Despite the strong recent economic data, rising inflation, and global uncertainties, the Fed members are not necessarily planning to raise rates. Therefore, what they say during the meeting will have a greater impact on market pricing than their actual actions. The market’s expectations for rate hikes are focused on the December and January meetings, both of which currently suggest no increase. This could change in the future, but for now, investors are anticipating no further rate hikes.

Therefore, without any unexpected changes in interest rates or unexpected guidance regarding rate decisions, what will be crucial this week for the US government’s financial condition and the confidence in US yields is the state of the country’s debt and the Treasury Department’s quarterly announcement about the specifics of the bonds they will issue to borrow an additional $776 billion this quarter.

The composition of the bond issuances by the US Treasury will be extremely important. If they start issuing shorter-term debt, it could help alleviate the pressure on long-term bonds. However, there is a problem with this approach as the Treasury has already sold a significant amount of short-term bills, coming close to their self-imposed limit of 20% last quarter. That’s why they have decided to sell more longer-term bonds since September. This shift towards longer-term debt is the reason why long-term yields have increased since September. Therefore, it’s not guaranteed that the Treasury’s issuance calendar will completely calm the concerns of bond investors on Wednesday.