10-year Treasury yield jumps as traders eye Treasury’s quarterly refunding process

The refunding process is already creating angst in the bond market because of nervousness around the U.S. government’s growing deficit. On July 31, Treasury revealed that it expected to borrow an eye-popping $1.007 trillion in the third quarter.

Tuesday brings the latest monetary policy decision from the Bank of Japan, which has the potential to affect the fixed-income market if the central bank makes adjustments to its yield-curve control policy.

Then on Wednesday, the U.S. Treasury will provide more details from its quarterly refunding process, such as upcoming auction sizes, which have the potential to overshadow the Federal Reserve’s policy announcement on the same day.

Markets are pricing in a 98.2% probability that the Fed will leave interest rates unchanged at between 5.25%-5.5% on Wednesday, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% by December is seen at 24.5%, though that may change depending on what Fed Chair Jerome Powell says during his post-meeting press conference.

The Bank of England is also expected to leave rates unchanged on Thursday. Friday brings October’s U.S. nonfarm payrolls report.

What analysts are saying

“It’s an important week in the Treasury market for a number of reasons,” said BMO Capital Markets rates strategists Ian Lyngen and Ben Jeffery. “Beyond the financing estimates, refunding announcement, FOMC decision, and payrolls report, investors will also have an update from the Bank of Japan on Tuesday. While expectations differ regarding how the BoJ will move toward a less accommodative policy stance, it’s widely anticipated that a change to yield curve control is in the offing.”

The relevant question for U.S. rates “is whether such a move from the BoJ will be yet another reason to push 10-year yields back toward 5.0% or if it will be a fact to buy, as it were,” they wrote in a note.