JPMorgan: The Federal Reserve will hold steady tonight as the $4.1 trillion financing gap looms closer; the real highlight for US Treasuries comes next week.

According to Jinse Finance APP, JPMorgan's fixed income strategy team, including Jay Barry, stated that the Federal Reserve is very likely to keep interest rates unchanged on Wednesday, but there may be more than one hawkish dissenting vote. For the U.S. Treasury bond market, however, next week’s Treasury Department quarterly refinancing announcement is the real highlight.

The Fed Is Expected to Hold Rates Steady as Hawkish Dissent Emerges

On the eve of the rate decision, U.S. Treasury yields remained within a range, with the yield curve flattening by 1 basis point. JPMorgan aligns with market consensus, expecting the Fed to hold steady. However, Cleveland Fed President Loretta Mester and Dallas Fed President Lorie Logan are expected to cast hawkish dissenting votes, and there is also a risk that Minneapolis Fed President Neel Kashkari will join them.

The real focus is on how Chair Jerome Powell explains: why, when the core PCE was at 0.2% month-over-month in September, the Fed opted to hike rates, but with the next reading forecast at 0.3%, they are expected to hold. JPMorgan believes that if Powell avoids the explanation, the market will interpret it as a dovish signal.

Refinancing Preview: Unchanged Size, a Needed Change in Wording

The Treasury Department will announce its quarterly financing estimate on November 2 and release the full refinancing statement on November 4. JPMorgan expects the size of coupon-bearing debt auctions to remain unchanged. The fundamentals are: the fiscal year 2026 deficit is $1.992 trillion, just $28 billion narrower than the bank’s forecast; the fiscal year 2027 deficit forecast remains at $1.96 trillion. This corresponds to $2.038 trillion in net borrowing by the private sector in 2026, and $2.202 trillion in 2027. Of this, net supply of short-term Treasury bills will increase by $991 billion in 2027, the highest since 2023.

JPMorgan frankly states that, from a prudent debt management perspective, the Treasury should remove the word “at least” from guidance that currently says “auction sizes are expected to remain at least steady over coming quarters.” In fact, the Treasury Borrowing Advisory Committee (TBAC) already recommended updating the language in August to retain flexibility.

However, the Treasury’s caution regarding yield levels is obvious: in August, it changed “assessing potential increases” to “assessing future adjustments,” and two weeks later unexpectedly raised long-end buyback amounts. The bank thus judges that the current guidance will continue through 2027, with auction sizes unchanged until August 2027, after which several quarters of higher supply will begin, mostly concentrated in 2- to 10-year notes.

A $4.1 Trillion Shortfall

Under the current auction framework, the funding gap for fiscal years 2027 to 2030 is as high as $4.1 trillion. The report argues that reducing long-term auctions to suppress yields lacks structural merit and will only shift funding pressure to short-term bills. According to their forecasts, the proportion of short-term debt to tradable debt will rise to 24% by the end of 2027 and 25% by the end of 2028, with the weighted average maturity of outstanding debt set to shorten by about three months to 66.9 months over the next two years.

A significant funding gap will emerge in the coming years

However, the elasticity of demand for short-term bills is in doubt: money market fund growth has slowed to its lowest pace in years, foreign official holdings have fallen recently, stablecoin supply has stagnated for 18 months, and dealers are forced to absorb more issuance. By contrast, demand for the long end is strong: since the beginning of the year, terminal demand for 30-year auctions has been the strongest on record.

Proportion of short-term bills to tradable debt will rise to 25%

Positioning Changes

In terms of positions, the bank’s U.S. Treasury client survey shows duration Overweight has risen to the highest level since November 2025. They recommend continuing with 10s/30s steepener strategies and closing long positions on the 10-year IOTA (the breakeven between inflation swaps and TIPS), which has lost 2.5 basis points since inception.

On the data front, U.S. CPI inflation swaps have averaged daily volumes of $11.6 billion this year, up 57% year-over-year and already amounting to 48% of TIPS volumes. Technically, the 2-year U.S. Treasury yield has encountered resistance at 4.60%-4.63%. Unless the S&P 500 Index falls below critical support at 7,500-7,600 points, front-end rates are expected to remain in a range in Q4, with the upper end seen at 5.00%. Short-term support below is at 4.825%; if yields continue to fall, the 4.35%-4.43% range is a firmer bottom.