US longer-term treasury yields have generally remained elevated since late-2024, driven more by fiscal policies, although the US Dollar has weakened. Given the concern on cost of borrowing, we look at a few policies that could limit the upside in longer-term yields.
- More borrowing at the shorter end – The current government has continued with this. From 73% in Q3 2022, share of treasury bills issued is now at 84% (figure above).
- Changes to Supplementary Leverage Ratio (SLR), the capital required to be held by banks relative to their leveraged exposure – The SLR was adopted after the 2008 crisis to bolster the strength of the banking system. During the pandemic, the Fed temporarily excluded treasuries and deposits at Federal Reserve banks from the SLR calculation. Last month, the Fed proposed to reduce the capital required by bank holding companies and subsidiaries to 3.5%-4.5%, from 5% and 6% respectively. This is intended to improve intermediation in the treasury market and could marginally incentivize holding of treasuries by making the capital requirement less onerous.
- Treasury buyback of securities – A higher buyback is a potential policy, but this needs to be funded. This could imply higher borrowing at the shorter end to fund the buyback at the longer end.
- When will the Fed’s Quantitative Tightening (QT) end? The Fed tapered QT by reducing its monthly treasury redemption cap, in June 2024 (USD 60bn to USD 25bn) and in April 2025 (to USD 5bn). Reinvestment above this cap and the USD 35bn cap for agency debt & Mortgage-Backed Securities (MBS) happens at the weighted average maturity of treasury securities outstanding (5.9 years as in Q2 2025). However, change to the cap on treasury and MBS is based on other considerations.
US fiscal policies have been a major factor behind rising long term treasury yields. Ceteris paribus, the factors listed above can work to limit the upside. If growth worries and Fed rate cut expectations rise, that could be another major factor in lowering rates. The interplay among these will be crucial. Irrespective, the US Dollar could remain weak.
Source for the chart: U.S. Department of the Treasury, Bandhan MF Research.
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