The Fed is split due to different perceptions on policy restrictiveness and on the inflationary impact of tariffs, so the addition of a dovish FOMC member can meaningfully impact policy. Chair Powell held policy steady in large part on his assertion of a solid labor market, the modest restrictiveness of policy, and above target inflation. But the FOMC's perception on the labor market has likely shifted to one of weakness on account of recent data. […]
Treasury's continued guidance to maintain coupon sizes for "several quarters" suggests that any support for longer dated rates from issuance changes will be gradual and backloaded. Trump had suggested a shortening of maturity structure of the Treasury market, but Treasury instead stuck to its regular and predictable pace. However, maintaining the current coupon issuance sizes would still gradually result in a shorter debt maturity structure as the fiscal deficit grows faster than net coupon issuance. […]
The trade war is concluding with an effective tax hike worth about 1% of GDP that will slow growth and raise unemployment in the near term. While the minimum 15% tariff rate on major trading partners is less than that proposed on Liberation Day, it is a substantial increase from the low single digit effective rates last year. Preliminary data suggests that the tariffs will reduce profits or disposable income by at least $300b. That […]
The Supplementary Leverage Ratio reforms will give banks an extra $1.1 trillion in capacity to buy Treasuries, but regulatory relief alone may not be enough to encourage purchases. The SLR imposes costs on banks in proportion to the size of their balance sheet, so it discourages activity in low risk and high volume markets like Treasuries. The proposed lower SLR requirement would facilitate market making, but higher returns are needed to also make Treasuries an […]
The world is structurally very long dollar assets, so a rebalancing of dollar exposure by foreign investors would be a multi-year and self-reinforcing process that weighs heavily on dollar FX crosses. The overtly dollar negative policies of the Administration have prompted some investors to hedge their dollar exposure or outright reduce their dollar holdings. But foreigners maintain exceptionally large dollar exposure that is only growing with the rise in equity prices and persistently large U.S. […]
The passage of the Big Beautiful Bill unleashes a wave of bill issuance that will drawdown reserves enough to give more dovish leaning Fed members a reason to end QT. With the debt ceiling lifted, Treasury will seek to rebuild its cash holdings from the current $370b to a target of $850b over the coming weeks. This will drain RRP balances to zero, push reserve levels to multi-year lows, and place upward pressure on repo […]
