By Kate Duguid
NEW YORK, Mar 30 (Reuters) – Benchmark Treasury yields hit a 14-month high as large banks dumped their debt holdings ahead of a March 31 regulatory change and while traders preparing to rebalance their portfolios at the end of the quarter faced low market liquidity.
* The 10-year return rose to 1,776% on Tuesday in early London trading, its highest level since January 22, 2020. That made the yield curve measured by the spread between two-year and 10-year rates It will climb to its highest since July 2015.
* Traders should rebalance their portfolios at the end of the month and quarter, as the maturity of a bond portfolio shortens. To do so, they buy longer-term debt, which generally lowers returns. But this end-of-month and quarter demand is not enough to keep up with market liquidation.
* Liquidity has been poor because the end of March brings the end of an extension to a rule called the supplemental leverage ratio (SLR). The rule requires banks to hold more equity against Treasury bonds, as well as the deposits they hold with the Federal Reserve, leading them to cut their Treasury holdings and loans.
* “We are close to the end of the quarter, the end of the month and the SLR rules will change to become less T-friendly again. You can see what has happened to traders’ positions in recent weeks. Really they’ve been cutting their balance sheets very significantly, “said Tom Simons, an economist at Jefferies.
* “As a consequence, liquidity in the market is not really good, or at least not what we would consider normal, which is underpinning returns,” he added.
* The movement took the 10-year rate to exceed the psychological level of 1.75%. Without that cap, the return could begin to rise toward 2% supported by optimism about the deployment of coronavirus vaccines in the United States and expectations that President Joe Biden’s infrastructure initiative could increase debt issuance.
(Reporting by Kate Duguid, Edited in Spanish by Manuel Farías)