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Rates Spark: Pause For Thought


  • US Treasury yields have dipped, but we doubt there is significant downside.
  • The 5yr is on a cheapening trend, and there appears to be too much risk-on.
  • We also highlight some technical drivers (US auctions, specialness and front-end debate) as we wind up for the ECB tomorrow against a backdrop where "less said the better" might just be the most sensible approach.

By Padhraic Garvey, CFA, Regional Head of Research, Americas; Benjamin Schroeder, Senior Rates Strategist; Antoine Bouvet, Senior Rates Strategist

Source: Shutterstock

Some US technicalities, but important ones ahead

Back when Covid broke, the Federal Reserve gave US banks a break by allowing them not to include Treasuries in the calculation of the supplementary leverage ratio. The rationale for this was to provide banks with more room to provide credit to borrowers, without the need to raise offsetting capital.

One year down the line, this decision is under scrutiny. After all, this is an international ratio target, where US banks optically now get softer treatment. The counterargument goes that it is too early to withdraw this, as the crisis is far from concluded. But if it was reversed, it could mean that US banks offload the additional $400 billion that they have built up in Treasuries. This is not a front-and-centre risk, but it is brewing.

Meanwhile there is a growing possibility that the Fed may not need to hike the rate on excess reserves, as the funds rate continues to hold comfortably above zero. We'd still argue that an IOER hike is still more probable than not. With SOFR just a couple of basis points away from zero, there is a generic incentive to tighten things up on the front end.

5yr continues cheapening, 30yr richening

(Source: Refinitiv, ING)

An offsetting positive element that takes some pressure off has been a reduction in specialness attached to the 10yr, which had been trading close to the key -3% level. This is away from extremes now as we head into the 10yr auction. The decent 3yr auction yesterday augurs well for a decent takedown in the 10yr today. Although a lack of concession into it heightens the risk for some tailing. This will be a key barometer

This article was written by

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