The official website of Aohui: The Federal Reserve's policy shift and fiscal reassurance have given the US bond market a break

In the near future, the Federal Reserve may slow down the pace of reducing its balance sheet, and Treasury Secretary Vincent Bescent has also stated that it will not immediately issue more long-term bonds. These measures may ease the bond market's concerns about fiscal problems in the short term.Aohui official websiteWe will provide a detailed analysis of these policy changes and their impact on the short-term Treasury market.

Federal Reserve policy adjustment

Officials discussed the possibility of pausing or slowing quantitative tightening (QT), the Federal Reserve said in the minutes of its Jan. 28-29 policy meeting. That consideration is largely because constraints on the debt ceiling could affect the Fed's ability to assess market liquidity. In addition, the Fed is also considering adjusting its bond portfolio to better reflect the duration of the outstanding U.S. Treasury market. That means the Fed may increase its reinvestment in short-term bonds, thereby reducing future issuance of two- and three-year Treasury bonds.

The appeasement measures of the Ministry of Finance

In an interview with Bloomberg Television, Treasury Secretary Vincent Bescent said that additional issuance of long-term government bonds is not currently under consideration. The statement injected optimism into the market in the short term, driving US Treasury yields lower. However, expectations of increased supply of government bonds have not been completely eliminated, as investors and analysts predict that the Treasury will eventually need to borrow more money to deal with the decline in government revenue caused by the Trump administration's tax cuts.

Market reaction and expectations

However, market expectations for an increase in the supply of Treasuries remain, especially given the Trump administration's plans to extend and expand the 2017 tax cut bill, which could add more than $40,000 billion to the deficit over the next decade. While Musk's Department of Government Effectiveness and Trump's tariff plan may help contain deficit growth, its effectiveness is uncertain.

The 10-year U.S. Treasury yield fell by 1.66% last Friday, reaching a minimum of 4.405%, a new low since February 5, closing at 4.433%; on Monday (February 24), the 10-year U.S. Treasury yield hovered at a low level, currently trading near 4.421%, down about 0.27%.

analyst opinion

Brij Khurana, fixed income portfolio manager at Wellington Management, said Mr. Bescent's focus on funding costs was encouraging. JPMorgan analysts noted that bond market concerns about excessive debt supply could dissipate over the next few months, but still expect heavy government borrowing demand to lead to an increase in long-term bond supply in the next fiscal year. Brian Kennedy, portfolio manager at Loomis, Sayles & Company, said the push-and-pull effect between the tax cut deal and the savings from the Office of Government Efficiency would not change expectations of a difficult US long-term yield curve.

summary

To sum up, the Fed's policy adjustment and the Treasury's reassurance measures have brought some relief to the Treasury market in the short term. However, market expectations for an increase in the supply of Treasury bonds remain, especially in the context of the Trump administration's tax cuts that may lead to a large increase in the deficit. In the future, the trend of the Treasury market will be significantly affected by budget progress and tax performance. While the Fed's reinvestment strategy may reduce the issuance of short-term Treasury bonds, the supply pressure of long-term Treasury bonds cannot be ignored.