Early start could be a big win for SSA issuers

An overly pessimistic forecast for US unemployment could set the stage for a turbulent end to SSA issuance this year. The market is expecting a rapid easing of monetary policy, and this is another argument for early public sector issuance.

In Jerome Powell’s highly anticipated speech in Jackson Hole on Friday, the chairman of the US Federal Reserve made it clear that “the time has come” to cut interest rates. Although Powell did not give any indication of the magnitude of the impending rate cut, there is a growing feeling that unemployment figures are playing an increasingly large role in the decision, with inflation taking a back seat.

This shift in focus may explain why SSA issuers resumed benchmark issuance early after the summer lull this year. Within four working days last week, issuers had priced $31.5 billion worth of core currency benchmarks, almost 28% more than the volume in the first week of benchmark issuance in August 2023.

If the impression arises that the Fed is currently fixated on the labor market, bond yields will be more dependent on economic data.

In recent weeks, weak employment data and corporate earnings have dashed forecasts of a “soft landing” for the U.S. economy, triggered a stock market collapse and fueled calls for an emergency interest rate cut.

More economic data is due on September 6 with the release of non-farm payrolls and on Friday with personal consumption expenditures, so there is plenty that could upset the stable bond yields ahead of the Fed’s next interest rate decision in the middle of next month.

And that’s not even taking into account what the US election in November could bring. The race could be close, with one candidate seen as politically hesitant while the other is known for making up his policies as he goes along.

Donald Trump has already urged the central bank not to cut interest rates this year. If the former president is re-elected, he may well try to influence the Fed’s decision-making.

No one knows how difficult the terrain will be in the run-up to the US election and beyond. Early and prudent issuance has been the right move over the past two years, and this strategy is likely to prove the most responsible approach here too, with the Treasury at stake.