Synopsis:
BofA sees precautionary signs of stress in US funding markets, particularly around repo rates and short-term futures, though tensions have subsided for now. On yields, supply/demand pressures could push 10Y USTs up to 5.75%, beyond which the Fed may have to step in as a buyer of last resort.
Key Points:
-
Funding Market Stress — Flickers, Not Fire Yet:
-
Early last week, overnight UST repo rates spiked, exceeding quarter-end levels—pointing to liquidity strain.
-
April SOFR/FF futures were heavily sold after the weak 3-year UST auction, suggesting skepticism around Treasury demand.
-
However, stronger 10Y and 30Y auctions helped ease concerns.
-
Attention now shifts to tax-day liquidity drain (mid-April), which could revive funding pressures as collateral settles.
-
-
How High Can Yields Go?
-
Drawing parallels with the UK’s Truss-era yield shock, BofA estimates that 10Y UST yields could rise to 5.25–5.75% in a similar loss-of-confidence scenario.
-
Beyond this point, market dysfunction may force the Fed to intervene—not to ease, but to restore functioning.
-
Conclusion:
While funding pressures have cooled, BofA warns that stress could return, especially around April tax-related liquidity needs. Meanwhile, in a supply-driven rate spiral, UST yields near 5.75% may be the point where the Fed must step in, even without a policy pivot.
