These are issues the Treasury market must grapple with as we progress through 2025. And indeed into 2026 as tax cuts that get through the legislative process will take effect from January 2026 onwards. Meanwhile, the rising fiscal deficit continues to increase the supply of Treasuries in the market. This is occurring alongside the Federal Reserve’s quantitative tightening, which has already reintroduced approximately $2tr worth of Treasuries into the market.
The main impact of this fiscal pressure has been to cheapen Treasury yields relative to SOFR rates. For example, in the 10yr tenor, the spread from the SOFR rate to the Treasury yield is now about 50bp. That was averaging around 25bp through to the middle of 2023. Since then, there has been a ratchet higher in the spread. It has not been destabilising. Rather it’s been a slow and steady process. In its simplest terms, it effectively translates to an extra 25bp demanded…
