US Rates: Between a rock and a hard place

The recent FOMC meeting maintained current interest rates, though the committee signaled a hawkish stance by emphasizing the need for more data to reach its 2% inflation goal. Chair Powell’s announcement to reduce the frequency of policy-deciding meetings starting in 2026 introduces potential volatility and shifts in term premiums. Meanwhile, the upcoming Treasury refunding process faces a growing funding gap, with projections indicating $475 billion in net marketable borrowing for the current quarter and a heavy reliance on T-bill issuance. While maintaining current auction sizes remains the most prudent path, Treasury’s discomfort with long-end yields creates a risk of interventionist cuts to long-term auction sizes. Such a move could temporarily flatten the yield curve, though it may ultimately force a recalibration of term premiums within the intermediate sector of the market.