J.P. Morgan: Tightening US Treasury bill supply and demand; credit recovery still faces issuance pressure

How are the economy and Fed signals affecting the bond market?

US real GDP rose 3.4% quarter on quarter in the third quarter, while private domestic demand grew 4.9%, up from 4.6% in the second quarter. The year-on-year increase in the core PCE price index rose from 3.0% to 3.1% in September. JPMorgan expects the unemployment rate to fall to 4.1% and nonfarm payrolls to rise by 75 thousand in October, and continues to expect a Fed rate hike in December.
The Fed kept rates unchanged this week, but two members dissented in favor of a hike. Chair Warsh said one scheduled meeting in 2027 and two in 2028 are expected to focus on policy strategy rather than rate decisions; if other arrangements remain unchanged, some policy meetings will be 12 to 13 weeks apart.
The bank’s language model shows that the average relevance score for Warsh’s first four post-meeting press conferences was 28%, below the 61% recorded during Powell’s tenure. The bank therefore expects markets to pay more attention to remarks by other Fed officials.

JPMorgan believes the 10-year and 30-year US Treasury yield curve remains too flat and maintains its curve-steepening trade view. It expects the Treasury to leave coupon-bearing debt auction sizes unchanged in next week’s refunding announcement, which would also support near-term steepening.
Treasury bill valuations relative to SOFR have fallen substantially: money market fund asset growth has slowed, foreign official holdings have declined, stablecoin growth has stalled, and funds also prefer shorter-dated assets.
The bank expects net issuance of privately held Treasury bills to reach 991 billion dollars in 2027, with money market fund assets growing modestly, and therefore does not expect bill valuations to rebound significantly next year. Foreign demand could strengthen, but substantial growth in stablecoin assets may require a rise in cryptoasset markets.

Settlement of 110 billion dollars in Treasury bills this week, combined with Canadian year-end factors, tightened funding conditions slightly. JPMorgan expects funding conditions from November through December to remain broadly manageable as the seasonal peak in bill issuance passes and the US Treasury General Account balance declines.
However, if money market funds sharply reduce their repo allocations to absorb more bills, lower bill valuations could spill over into broader funding markets. The bank believes the November and December SOFR versus federal funds rate basis curve is close to fair value after flattening by 1.25 basis points in just over a month, and has therefore taken profit on the related trade.
Fewer policy decision meetings could concentrate rate adjustments of the same magnitude into fewer meetings, increasing realized volatility and jump risk. If implemented from autumn 2027, the impact could fall more heavily on longer maturities; the bank therefore cautiously maintains long exposure to forward volatility.

Investment-grade bond spreads continued to widen this week, though by less than in previous weeks; investment-grade bond funds attracted 4 billion dollars in inflows, mainly from ETFs. Microsoft’s 25 billion-dollar bond issue brought total issuance in October to 124 billion dollars, the second highest on record. Dealers bought a net 6 billion dollars, and absorption was strong.
JPMorgan believes higher, stabilizing yields, improving demand, declining net supply and sound corporate fundamentals are favorable for credit. However, concentrated issuance over the next two weeks combined with the midterm elections could bring short-term volatility, while expected financing supply from major cloud providers remains an important variable for spread performance.
There is also divergence within securitized products: data-center single-asset single-borrower CMBS remains under pressure. The bank expects the refinancing success rate for multi-borrower CMBS loans maturing in 2027 to be 50% excluding loans handled through debt exchange arrangements and 57% including them, below this year’s rate.