JP Morgan: The Fed will hold steady tonight, a US$4.1 trillion funding gap is closing in step by step, and the real highlight for US Treasuries is next week.

JPMorgan fixed income strategy team members including Jay Barry said the Fed will most likely keep rates unchanged on Wednesday, but there may be more than one hawkish dissenting vote; for the US Treasury market, next week's quarterly refunding announcement from the Treasury is the real highlight. **Fed expected to hold steady, hawkish dissents emerge** On the eve of the FOMC meeting, US Treasury yields remained range-bound, with the yield curve flattening by 1 basis point. JPMorgan aligns with market consensus in expecting the Fed to hold steady, but Cleveland Fed President Hammack and Dallas Fed President Logan are expected to cast hawkish dissenting votes, with Minneapolis Fed President Kashkari also at risk of joining. The real focus is how Chair Warsh explains why the Fed chose to hike in September when core PCE was 0.2% m/m, yet chose to stand pat when the next reading is expected at 0.3%. JPMorgan believes that if Warsh avoids an explanation, the market will interpret it as a dovish signal. **Refunding preview: sizes unchanged, wording should change** The Treasury will release its quarterly borrowing estimate on November 2 and the full refunding announcement on November 4. JPMorgan expects coupon auction sizes to remain unchanged. The fundamental numbers are: a FY2026 deficit of US$1.992 trillion, only US$28 billion narrower than the bank's forecast; the FY2027 deficit forecast is maintained at US$1.960 trillion. This corresponds to net private-sector borrowing of US$2.038 trillion in 2026 and US$2.202 trillion in 2027, with net bill supply increasing by US$991 billion in 2027the largest year since 2023. JPMorgan states bluntly that from a prudent debt management perspective, the Treasury should delete the word "at least" from its guidance of "expecting to maintain auction sizes for the next several quarters." In fact, the Treasury Borrowing Advisory Committee (TBAC) already recommended in August updating the wording to preserve flexibility. But the Treasury's wariness of yield levels is evident: in August it changed "evaluating potential increases" to "evaluating future changes," and two weeks later unexpectedly raised long-end buyback sizes. On this basis, the bank judges that existing guidance will persist through 2027, with auction sizes unchanged until August 2027, after which multiple quarters of increases begin, concentrated in the 2- to 10-year sector. **The US$4.1 trillion gap** Under current auction arrangements, the funding gap for fiscal years 2027 to 2030 is as high as US$4.1 trillion. The report argues that cutting long-end auctions to yields lacks structural merit and would only shift funding pressure to bills. By its forecasts, bills' share of marketable debt will rise to 24% by end-2027 and 25% by end-2028, and the weighted average maturity of outstanding debt will shorten by about 3 months to 66.9 months over the next two years. A large funding gap will emerge in the coming years But the elasticity of bill demand is questionable: money fund growth has slowed to the weakest in years, foreign official holdings have declined in recent months, stablecoin size has stagnated for 18 months, and dealers are forced to absorb more supply. In contrast, long-end demand is hot: end-user demand at 30-year auctions this year has been the strongest on record. Bills' share of marketable debt rises to 25% **Positioning changes** On positioning, the bank's Treasury client survey shows duration overweight has risen to the highest level since November 2025; it recommends continuing to hold the 10s/30s steepener and closing the long 10-year IOTA (the spread between inflation swaps and TIPS), which has lost 2.5 basis points since inception. On the data front, US CPI inflation swaps have averaged US$11.6 billion in daily volume this year, up 57% year-on-year and already equivalent to 48% of TIPS volume. Technically, 2-year Treasury yields face resistance at 4.60%-4.63%; unless the S&P 500 breaks below the key 7,500-7,600 support, front-end rates are expected to remain range-bound in Q4, with the upper bound at 5.00%; near-term support below is at 4.825%, and if yields continue to fall, the 4.35%-4.43% area is a firmer bottom.