In the US, the big unfolding narrative surrounds the move in longer tenor yields. The 30yr yield is heading in the direction of 4.5% while the 10yr is stretching below 4%. The dip lower is being helped by a contemporaneous tightening in swap spreads, by some 10bp in the past six weeks. In our mind, this is a reflection of the fiscal deficit outcome for 2025, which came in lower than for 2024, even if only by a smidgen. That eases the build in supply narrative, even as absolute levels of supply remain very elevated. Bills issuance is now running at 21% of marketable debt, which is high, and also keeping supply pressure away from the longer-term coupon curve.
There is also an anticipatory trade reflecting expectations for a loosening in the supplementary liquidity ratio for large US banks. We covered this here, showing how it can coax more buying of Treasuries. It can also add liquidity to repo. It’s needed as SOFR continues to trade at a rate discount. We don’t view this as reflective of a reserves’ shortage, as we view reserves as broadly in balance right now. Rather, it’s a market that could do with more participation. At the margin, the Fed is still engaging in mild quantitative tightening, but is likely to wind this down completely as far as Treasuries are concerned.
Bottom line, it’s easier for Treasuries than Repo to anticipate SLR adjustment. That said, we can’t ignore that inflation reading we’ll get this week, and its likelihood for a further creep higher in the coming months. The big question remains – can 10yr SOFR sit there at 3.5% if inflation trends up to the same level. For now, the 10yr is not showing too much concern. But that can change.