The U.S. Treasury Department is expected to issue $114 billion in bonds — at a time when Treasury yields are spiking and flirt with 5% rates — on Wednesday ahead of the Fed's November interest rate decision. Yahoo Finance Senior Reporter Jared Blikre monitors how Wall Street is reacting to this rising bond supply and expectations on the Fed's rate strategy.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
BRAD SMITH: Welcome back to "Yahoo Finance Live," everyone. We can expect some big bond market moves this week. And it won't be just because of the Fed. The Treasury Department's new borrowing plan, that will be out just hours ahead of the interest rate decision.
Here to break down what we can expect is our very own, Jared Blikre. Hey, Jared.
JARED BLIKRE: Hey, guys. Let's take a look at this. These are some big numbers. And you're right. It's not only the Federal Reserve that's going to be in focus this Wednesday at 8:30 AM, the Treasury borrowing action committee, they're going to announce a quarterly refunding statement for the Treasury with their input.
And this is what we're expecting next week, $114 billion in Treasury bonds and notes on supply. And this is a marked increase from the prior quarter in August that was announced for the upcoming months, which was $102 billion. Now, there are lots of reasons for these increases. We're not going to deal with what the Federal government is spending here. What I want people to take away-- this is a Treasury supply chart going all the way back to the beginning of January of last year, of 2022.
Here is where we are right now. And we are expecting the Treasury supply to increase over the coming quarters throughout the next year. And that's a very important distinction. Because, previously, we had seen it dropping quite precipitously into earlier this year. And that has to do with the debt ceiling and all kinds of other wonky market stuff.
A couple of things that affect Treasury supply, the Federal Reserve is on. it has its ongoing balance sheet reduction program going on. They are at about $8 trillion right now. That is a huge amount. But suffice to say that rather than accumulating bonds like in QE with QT, the Federal Reserve is decreasing its balance sheet. And it could be that some of this expected supply actually manifests itself in Treasury bills.
The Treasury has been selling short dated bills because it's easier for them to be absorbed into the market. So that's another hiccup here. But in terms of the interest rate, and that's really what this gets at, the more supply there is in the market, the lower bond prices go. And because bonds and yields are inversely correlated, that means yields are shooting up. And that's why we're seeing the 10-year at 4.8 9%.
Now, it's important to say that the Federal Reserve Jerome Powell, based on his recent comments, does not believe that this is because inflation expectations are higher. He thinks it's endemic to the bond market. Something called the term premium. And that has to do with the amount of risk that's held by an investor. That's not otherwise described by, for instance, Fed monetary policy or inflation expectations.
And then I'll end with this. There's one more monkey in the wrench. And that could be Japan. We have Japan's 10-year yields close to 1% now. That is the highest in decades. And we know that the Japanese investor, they like to save in bonds. So as the Japanese market becomes more competitive with the US in terms of yields, that's also going to mean less Treasury supply.
So we know that China hasn't been buying as much. The Fed isn't buying. Potentially, Japan is a competitor for the Treasury bond market. All of this put together means that we don't have a lot of certainty in the Treasury market right now. And that spills over into equities, which is why we're seeing a lot of this weakness.
SEANA SMITH: It certainly does. A massive driver in equities as of late. All right. Jared, great stuff. Thanks.