What Might Be In *Another* Market-based Yield Curve Twist?

With the UST yield curve currently undergoing its own market-based twist, it’s worth investigating a couple potential reasons for it. On the one hand, the long end, clear cut reflation: markets are not, as is commonly told right now, pricing 1979 Great Inflation #2, rather how the next few years may not be as bad (deflationary) as once thought a few months ago.

On the other hand, over at the short end, yields are dropping toward zero again. This steepening isn’t quite the “good” version.

Supply issues are coming to T-bills, as we know, but anything else? There’s been demand for these instruments which predates Janet Yellen resurfacing at the Treasury Department to unleash TGA drains and debt refunding.

I gave one longer-term explanation for heightened(ing) bill demand here (NPL’s and possible bank downgrades on an economy that stumbles rather than gets stimulated). I offered another technical possibility last Friday, one that would account for both sides of the yield twist:

If it requires offsetting positions to make sure that a bank’s balance sheet hasn’t grown “too much” during the SLR relief period, this might entail having to sell assets to get in under thresholds. Given a choice, while these banks can use bank reserves to satisfy some surcharges, maybe they’d prefer selling off long end UST’s in favor of holding onto T-bills (or even buying more).

Looking into recent price/yield history, yeah, that’s in there:

While November 10 represented Pfizer’s “stunning” vaccine announcement, it was also around that time jobless claims bottomed out therefore rising economic retrenchment risks; riskier in the short and intermediate terms with rising reflation potential if we can get beyond all that (which markets are becoming more complacent about the possibility).

In early January, reflation was given another boost, allegedly, by the results of the Georgia Senate elections which cleared the path for more gigantic “stimulus.” Yet, bills weren’t performing that way at all; in fact, since around January 20 or even as early as January 14 (the latter for the 4-week bill; specific dates depend upon the specific maturity) that’s when bill rates really started to decline.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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