Recently, the Federal Reserve may slow down the pace of reducing its balance sheet, while Treasury Secretary Besson has also stated that it will not immediately issue long-term bonds. These measures may alleviate the bond market's concerns about fiscal issues in the short term. This article will provide a detailed analysis of these policy changes and their impact on the short-term US Treasury market.

Federal Reserve policy adjustment

The minutes of the Federal Reserve's policy meeting on January 28-29 showed that officials discussed the possibility of suspending or slowing down quantitative tightening (QT). This consideration is mainly due to the constraint of the debt ceiling, which may affect the Federal Reserve's ability to assess market liquidity. In addition, the Federal Reserve is also considering adjusting its bond portfolio to better reflect the duration of the outstanding U.S. treasury bond bond market. This means that the Federal Reserve may increase the reinvestment of short-term bonds, thus reducing the additional issuance of two-year and three-year treasury bond bonds in the future.

The appeasement measures of the Ministry of Finance

In an interview with Bloomberg TV, Finance Minister Vincent Besant said that he did not consider issuing additional long-term treasury bond at present. This statement injected optimism into the market in the short term, driving down US bond yields. However, the market's expectation of an increase in the supply of treasury bond has not been completely eliminated, because investors and analysts expect that the Ministry of Finance will eventually need to borrow more funds to cope with the decline in government revenue caused by the Trump government's tax cut policy.

Market reactions and expectations

The yield of US Treasury bonds fell after the release of the minutes of the Federal Reserve meeting, and Besson's statement further pushed down the yield. However, the market's expectation of an increase in the supply of treasury bond still exists, especially considering that the Trump government plans to extend and expand the 2017 tax cut bill, which may increase the deficit by more than $400 billion in the next 10 years. Although Musk's government efficiency department and Trump's tariff plan may help curb deficit growth, their effects are still uncertain.

The yield on 10-year US Treasury bonds fell 1.66% last Friday, hitting a low of 4.405%, the lowest since February 5th, and closing at 4.433%; On Monday (February 24th), the yield of 10-year US Treasury bonds hovered at a low level, currently trading around 4.421%, with a decline of about 0.27%.

Analyst's viewpoint

Brij Khurana, a fixed income portfolio manager at Wellington Management, said that Benson's focus on financing costs is encouraging. Morgan Stanley analysts point out that concerns about excessive debt supply in the bond market may gradually dissipate in the coming months, but they still expect a large demand for government borrowing in the next fiscal year to lead to an increase in long-term bond supply. Brian Kennedy, portfolio manager at Loomis, Sayles&Company, believes that the push-pull effect between the tax cut agreement and the government efficiency office's cost savings will not change the expectation of a difficult trend in the US long-term bond yield curve.

summary

In summary, the policy adjustments of the Federal Reserve and the appeasement measures of the Treasury Department have brought some relief to the US bond market in the short term. However, the market's expectation of an increase in the supply of treasury bond still exists, especially against the background that the Trump government's tax reduction policy may lead to a substantial increase in the deficit. In the future, the trend of the US bond market will be significantly influenced by budget progress and tax performance. Although the reinvestment strategy of the Federal Reserve may reduce the issuance of short-term treasury bond bonds, the supply pressure of long-term treasury bond cannot be ignored.