Treasury Yields Rise Amid Eurozone Liquidity Tightening

The US Treasury market is experiencing a heavy tone, with yields above 4.65% for the 10-year note. This typically prompts soothing words from the Trump administration regarding an imminent resolution to the war with Iran, but that's not the case this time. The 60-day truce has ended without a clear resolution, and energy prices are seeing upside pressure.

Real yields have been increasing, partly due to aggregate issuance pressure, but also because they're returning to more normal levels after being depressed during the pandemic years. The latest US Treasury International Capital (TIC) system data showed a $72bn net liquidation of US Treasuries by foreigners in June.

In the eurozone, liquidity conditions are tightening due to the European Central Bank's bond portfolios running off. Excess reserves have fallen to €2.16tn, down around €300bn this year alone. This has led to tighter funding spreads and a decrease in banks' recourse to the ECB's weekly liquidity-providing operation.

The ECB expects its balance sheet reduction to continue, but at some point, someone will need to tap into its liquidity-providing operations. The share of government debt held by the ECB will also shrink as crisis portfolios are offset and government issuance increases.