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**U.S. Long-End Yields Diverge as Market Bets on Easing Supply Pressure**
A growing divide between the long and intermediate ends of the U.S. Treasury curve has captured market attention over the past week. The 30-year Treasury yield is approaching 4.60%, even as the 10-year yield dips below the key psychological threshold of 4.00%. This yield pattern reflects a combination of improving fiscal optics, adjustments in Treasury issuance, tighter swap spreads, and expectations for regulatory relief impacting major financial institutions.
### Fiscal Moderation and Supply Recalibration
The pullback in yields follows the announcement of a slightly improved U.S. fiscal deficit for fiscal year 2025. The deficit amounted to $1.78 trillion, a $41 billion reduction from the previous year. While the narrowing is modest, it has contributed to easing investor concerns about ballooning Treasury issuance, especially for longer maturities like the 10-year and 30-year bonds.
Markets have also taken note of a shift in the composition of marketable debt. As of October, Treasury bills accounted for approximately 21.2% of total marketable U.S. debt, up from about 17% the year prior. This pivot towards the front end helps reduce the issuance burden on longer maturities, adding to demand support at the long end. Concurrently, 10-year swap spreads have tightened by roughly 10 basis points over the past six weeks—moving from around –12 basis points to –22 basis points—suggesting stronger relative demand for Treasuries over derivatives.
### Regulatory Shifts and Liquidity Expectations
Another key driver of the ongoing rally is speculation that regulators may adjust the Supplementary Leverage Ratio (SLR), a post-crisis rule that limits the amount of leverage big banks can take on. A relaxation of the SLR, last eased temporarily during the pandemic, would give banks more flexibility to hold U.S. Treasuries without facing steeper capital requirements. Analysts estimate this could unlock $200–$250 billion in additional balance sheet capacity for Treasury holdings at the largest financial institutions.
This regulatory change could also address frictions in the repo market, where the Secured Overnight Financing Rate (SOFR) continues to trade at a slight discount. That discount highlights soft demand for secured funding—not a lack of liquidity, but rather a lack of balance sheet intermediation capacity. Repo volumes have risen, averaging $1.65 trillion daily so far this month compared to $1.52 trillion in August. Still, the SOFR discount points to structural imbalances. Easing the SLR would help restore balance in collateral flows and reduce funding stress.
### The Inflation Question: Can the 10-Year Yield Hold?
Despite these favorable developments, inflation remains a potential headwind. Headline inflation is showing renewed momentum due to rebounding energy and services costs, even as core inflation holds steady around the 3% level.
Valuations are beginning to feel the strain. With the 10-year nominal Treasury yield at approximately 4.02% and the 10-year TIPS yield around 1.71%, the implied breakeven inflation rate hovers near 2.3%. If inflation expectations begin to rise, that breakeven could be tested. Meanwhile, the 10-year SOFR swap rate is holding between 3.55% and 3.60%, suggesting markets anticipate long-term policy rates will settle well below current Treasury yields.
At present, the market’s bias leans toward lower yields, supported by more favorable fiscal projections, shorter-duration issuance trends, and a possible easing in bank capital rules. However, whether this rally can sustain depends largely on inflation dynamics. If price stability wobbles, long-end optimism may quickly give way to renewed upward pressure on yields.
The coming months will reveal whether fundamentals can continue to support this rally or whether inflation concerns will reassert themselves as the central narrative into year-end.
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This article originally appeared on Connect CRE.
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