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ECB expected to expand QE program by December's meeting
U.S. national debt has gone hyperbolic with pandemic expenses
5-year T-note auction to yield near 0.33%

ECB expected to expand QE program by December’s meeting — The ECB at its regular meeting on Thursday is expected to leave its main policy variables unchanged. The ECB’s main refinancing rate has been at zero since 2016, and the deposit rate has been at -0.50% since September 2019. The ECB is not expected to cut rates further into negative territory but is instead expected to extend its QE program to provide more stimulus to the economy.

The consensus in a recent survey by Bloomberg is that the ECB will take no action this week, but that the ECB at its next meeting in December will announce a 500 billion euro hike in the capacity of its QE Pandemic Emergency Purchase Program (PEPP) program to 1.85 trillion euros from the current 1.35 trillion euros. The ECB is also expected to extend that program by six months to December 31, 2021 from the current ending date of June 30, 2021. The ECB will release its next set of macroeconomic forecasts at its next meeting in December, making that meeting more appropriate for announcing a QE extension.

The ECB has used only half of the current PEPP capacity of 1.35 trillion euros, which means that the announcement of a QE expansion can wait until December. However, there is a chance that the ECB could announce that extension as soon as this week to provide the markets with some comfort that more help is on the way as the pandemic worsens. The ECB is expected to leave its other QE program, the Asset Purchase Program (APP), unchanged at 20 billion euros per month.

Eurozone GDP forecasts are being trimmed for Q4 due to the worsening pandemic, and there is even outside talk about the possibility of a double-dip recession. This Friday’s Eurozone Q3 GDP is expected to show an increase of +9.6% q/q, which would not fully overcome the -11.8% q/q plunge seen in Q2. After this week’s report, the consensus is for a Q4 GDP increase of +2.0% q/q, but forecasts are being revised lower from that level due to the worsening pandemic.

U.S. national debt has gone hyperbolic with pandemic expenses — The U.S. national debt, which was already on a relentless upward track before the pandemic, has gone hyperbolic this year due to Congressional spending for pandemic rescue programs and the reduced tax revenues caused by the pandemic recession.

Regardless of the outcome of next Tuesday’s election, the national debt will continue to soar over the next year on debt-fueled stimulus spending. If Republicans retain control of the Senate in next week’s election, then Speaker Pelosi (who is highly likely to remain in control of the House) will likely be forced to bring her current demands for a stimulus bill down below $2 trillion and perhaps even as low as $1 trillion to satisfy Senate Republicans.

However, if Democrats sweep Washington, then the markets are expecting a big stimulus bill of $2-3 trillion to cover pandemic relief as well as spending on infrastructure and clean energy. Either way, the national debt will be going up by at least another $1 trillion on top of the already-existing rise in the national debt.

The CBO is projecting that the U.S. budget deficit in 2020 will triple to $3.3 trillion (16% of GDP) and will then remain extremely high at $1.8 trillion in 2021 and $1.3 trillion in 2022. Those deficits will go straight towards increasing the national debt. The U.S. national debt has already soared by +$3.8 trillion (+16%) from the pre-pandemic level seen in February. The national debt has risen by +$7.2 trillion (+36%) since President Trump took office in January 2017 and has more than tripled since 2007.

The CBO is forecasting that the national debt will rise to 98% of GDP this year (vs 79% and the end of 2019), and will rise farther to over 100% in 2021 and 107% in 2023, thus exceeding even the record high seen in 1946 at the end of World War II.

5-year T-note auction to yield near 0.33% — The Treasury today will sell $26 billion of 2-year floating-rate notes and $55 billion of 5-year T-notes. The $55 billion size of today’s 5-year T-note auction is up by $2 billion from last month’s $53 billion auction and by $14 billion (+34%) from the $41 billion size that prevailed in 2019 and early 2020 before the U.S. budget deficit exploded due to pandemic expenses.

The Treasury will then conclude this week’s $188 billion T-note package by selling $53 billion of 7-year T-notes on Thursday.

The benchmark 5-year T-note yield on Tuesday closed -2 bp at 0.33%, falling farther from last Thursday’s 4-3/4 month high of 0.38%. Treasury yields rose last week on talk of a pre-election stimulus bill and a possible Democratic sweep that would produce a big stimulus bill in early 2021. However, yields have since fallen back on less certainty about the election outcome and the worsening pandemic, which will hurt the economy and undercut Treasury yields no matter which party controls Washington.

The 12-auction averages for the 5-year are: 2.49 bid cover ratio, $23 million in non-competitive bids, 4.5 bp tail to the median yield, 21.0 bp tail to the low yield, and 41% taken at the high yield. The 5-year is moderately below average in popularity among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of 61.1% of the last twelve 5-year T-note auctions, which is moderately below the median of 63.8% for all recent coupon auctions.

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