Core Viewpoint - The research institution Wrightson ICAP indicates that the Federal Reserve may announce the end of its balance sheet reduction next week due to signs of funding pressure in the repurchase market [1][2]. Group 1: Federal Reserve Actions - The Federal Reserve is expected to halt the reduction of its bond holdings in the upcoming interest rate decision [1][2]. - Federal Reserve Chairman Jerome Powell hinted earlier this month that the central bank is waiting for the right moment to end the balance sheet reduction [1][2]. - The institution anticipates that the Federal Reserve will begin purchasing U.S. Treasury bonds to offset maturing mortgage-backed securities, thereby maintaining a stable overall balance sheet size [1][2]. Group 2: Market Implications - As the Federal Reserve shifts towards a neutral policy stance, the supply of short-term government bonds in the market may decrease by approximately $20 billion per month [1][2].

Core Viewpoint - The article discusses the impending surge in the supply of short-term U.S. Treasury bonds due to significant fiscal deficits resulting from the recent tax and spending legislation, which is projected to increase the national deficit by up to $3.4 trillion from fiscal years 2025 to 2034 [2][3]. Group 1: Supply and Demand Dynamics - The U.S. Treasury is expected to issue a large volume of short-term debt to manage the financing needs, as the current yield on one-year and shorter-term bonds has risen above 4%, which is still lower than the nearly 4.35% yield on ten-year bonds, making short-term debt a cost-effective option [3][4]. - The market is currently experiencing a shift in focus from concerns about long-term bond sell-offs to the potential oversupply of short-term bonds, with predictions that the proportion of short-term debt could rise from 20% to 25% of total outstanding debt [5][6]. - There is a significant demand for front-end debt, supported by approximately $7 trillion in money market funds, which is expected to absorb the increased supply of short-term Treasury bonds [5][6]. Group 2: Market Sentiment and Future Outlook - Some market participants express optimism that the next financial crisis will not stem from short-term bonds, citing the substantial liquidity in the market and the attractive real yields available [7][8]. - The Federal Reserve is anticipated to intervene if any supply-demand imbalances arise, providing support to stabilize the market [8].