Provided the rhythm of a 25bp cut per meeting is not upset by anything that the FOMC does or that Chair Powell says, the impact of this meeting is not expected to be particularly pivotal for Treasuries. When we look at the curve, we’d suggest the 2-year yield should be below 4%, and should be settling in the 3.75% to 4.0% range. And we therefore see potential for the curve to steepen from the front end. The 10-year at around 4.25% is more prone to maintaining a heavy tilt, with upside for the 10-year yield still probable until or unless we get some material evidence that the economy is really stalling. The latest weather/strike impacted payrolls report did not give us that, at least not yet. A Trump win sustains that trade. A Harris win reverses it, as would no immediate outcome and acrimony.
In terms of liquidity and the plumbing, the Fed continues to engage in tapered quantitative tightening. It’s having an effect, but on a very gradual basis. Bank reserves plus the cash going back to the Fed on the reverse repo facility are running in the area of US$3.4tr, which is quite comfortable. In fact, we’d read this as representing an excess liquidity of some US$0.5tr still. Also note that the US Treasury has a cash balance at the Fed of some US$0.8tr. As they allow this to run down into the early part of 2025 when the debt ceiling is resurrected, liquidity will be injected back into the system. Overall, we’d view liquidity conditions as remaining ample through the coming few months, and we doubt the Fed needs to make any immediate adjustments here.