What Will Drive US Rates From Here?
​ A stellar July jobs report will keep the FOMC on track to normalize policy. A September launch to the Fed’s balance sheet reduction program seems all but certain. Though the prospects for a December rate hike are much less clear.
However, the biggest news of the week was not Friday’s jobs number! It was an obscure announcement by Treasury earlier in the week that got much less attention. This will drive the yield curve and LT rates for the next few months. The US Treasury plans to ramp up their issuance sharply in Q4 to over $500 billion - a level last seen in 2010. The surge in issuance is largely due to distortions created by the debt ceiling limit. This coincides with the Fed beginning to recede from bond markets as well. The emerging supply-demand dynamics will boost LT rates and steepen the yield curve more than markets expect by the end of the year.
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