Earlier we sent out a short piece on the proposed recalibration of the enhanced Supplementary Leverage Ratio, which applies to Global Systemically Important Banks and their subsidiaries is open for public comment until 26 August 2025. The full pieces is here, with all its detail. But cutting to the chase, broker-dealers and depository subsidiaries could potentially add $3trn in Treasuries or reserves, about 9% of marketable debt – over time.
Is this impactful for Treasuries? For sure if up-front inflows dominate. But a more gradual application would be less impactful. Still, it’s a positive impulse. Just as the backing of stablecoins with Treasury bills is a positive for bills demand into the medium term, which also has a potential multi-trillion dollar demand effect. Again, a positive. But only meaningfully impactful if accelerated, as supply is increasing significantly too.
Remember, the fiscal deficit of $2trn means adding that every year to the size of debt outstanding. That’s some $10trn over five years, and will need appetite to grow with it.
Still, for the Treasury market bulls, this extra demand potential is a positive factor. One that can offset to an extent fiscal and supply concern. And it can even mute tariff-related inflation concern. That said, we continue to view the likely rise in US core inflation in the coming 3-6 months as a burdensome factor for longer-dated securities. And any cut in rates that appears to come from a Fed that is deemed to be politically motivated will also pose issues for longer dates. No simple bull story here per se for Treasuries.
Thursday is likely to see US PPI core inflation back up to 3% year-on-year (for July), and core CPI inflation was confirmed earlier this week at 3.1% YoY for the same month. In all probability these inflation rates will be on the rise in the coming 3-6 months, and can easily touch 4% before peaking. That remains a dominating factor for the long end to worry about, and rate cuts don’t necessarily take long end pain away, in fact they can potentially exacerbate it.