JPMorgan's fixed income strategy team, led by Jay Barry and others, stated that the Federal Reserve is highly likely to keep interest rates unchanged on Wednesday, but there may be more than one hawkish dissenting vote; for the Treasury market, next week's quarterly refunding announcement from the Treasury Department is the real headline event.
Fed expected to hold steady, hawkish dissents emerge
Ahead of the policy meeting, Treasury yields remained range-bound, with the yield curve flattening by 1 basis point. JPMorgan aligns with market consensus in expecting the Fed to stay put, but Cleveland Fed President Hammack and Dallas Fed President Logan are expected to cast hawkish dissenting votes, with Minneapolis Fed President Kashkari also at risk of joining them. The real question is how Chair Warsh will explain why the Fed chose to hike in September when core PCE was running at 0.2% month-over-month, yet chose to wait and see when the next reading is expected to be 0.3%. JPMorgan believes that if Warsh avoids an explanation, the market will interpret it as a dovish signal.
Refunding preview: size unchanged, language should change
The Treasury will release its quarterly borrowing estimates on November 2 and the full refunding announcement on November 4. JPMorgan expects coupon auction sizes to remain unchanged. The fundamental numbers are: a fiscal 2026 deficit of $1.992 trillion, only $28 billion narrower than the bank's forecast; the fiscal 2027 deficit forecast remains at $1.960 trillion. This corresponds to net private-sector borrowing of $2.038 trillion in 2026 and $2.202 trillion in 2027, with net T-bill supply increasing by $991 billion in 2027, the largest year since 2023. JPMorgan states bluntly that from a prudent debt management perspective, the Treasury should delete the word "at least" from its guidance that it "expects to maintain auction sizes for the next several quarters." In fact, the Treasury Borrowing Advisory Committee (TBAC) already recommended in August updating the language to preserve flexibility. But the Treasury's wariness about yield levels is evident: in August it changed "assessing potential increases" to "assessing future changes," and two weeks later unexpectedly raised long-end buyback sizes. Based on this, the bank judges that the existing guidance will persist through 2027, with auction sizes unchanged until August 2027, after which multiple quarters of increases will begin, concentrated in the 2- to 10-year sector.
$4.1 trillion gap
Under current auction arrangements, the funding gap for fiscal years 2027 through 2030 reaches $4.1 trillion. The report argues that cutting long-end auctions to suppress yields lacks structural merit and would only shift funding pressure to short-term debt. According to its forecasts, the share of T-bills in marketable debt will rise to 24% by the end of 2027 and 25% by the end of 2028, with the weighted average maturity of outstanding debt shortening by about 3 months to 66.9 months over the next two years. Large funding gaps will emerge in the coming years, but the elasticity of T-bill demand is questionable: money market fund growth has slowed to its weakest pace in years, foreign official holdings have declined in recent months, stablecoin size has stagnated for 18 months, and dealers are being forced to absorb more supply. In contrast, long-end demand is robust: end-user demand for 30-year auctions this year has been the strongest on record.
T-bill share of marketable debt rising toward 25%
Positioning changes
On positioning, the bank's Treasury client survey shows duration overweight has risen to its highest level since November 2025. It recommends continuing to hold the 10s/30s steepener and closing the long 10-year IOTA (the spread between inflation swaps and TIPS), a trade that has lost 2.5 basis points since inception. On the data front, U.S. CPI inflation swaps have averaged $11.6 billion in daily volume this year, up 57% year-over-year, equivalent to 48% of TIPS volume. Technically, the 2-year Treasury yield faces resistance at 4.60%-4.63%; unless the S&P 500 breaks below the key 7,500-7,600 support, front-end rates are expected to remain range-bound in the fourth quarter, with the upper bound at 5.00%; near-term support lies at 4.825%, and if yields continue to decline, the 4.35%-4.43% area is a more solid bottom.
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