Treasury Yields Climb Amid War Tensions, Eurozone Liquidity Dries Up

The US Treasury market remains under pressure, with long yields continuing to rise. This trend has been driven by concerns over the war in Iran and ongoing geopolitical tensions.

In the eurozone, excess reserves in the banking system have fallen sharply, leading to tighter liquidity conditions. The European Central Bank's bond portfolios are running off, reducing excess reserves from €2.16tn to around €300bn this year alone.

This has led to increased funding spreads in unsecured short-term markets, with the overnight ESTR at its widest level versus the ECB deposit facility rate since 2021. However, conditions remain nuanced, and overall liquidity appears ample.