In the Eurozone, ECB’s Schnabel sees money market rates rising as system reserves decline, with banks then turning to the ECB for liquidity. It is part of the plan and could happen in mid-2026, but is more likely to happen later. Meanwhile, US Treasuries are being buffeted by contrasting impulses. It's been quite a week, but we broadly end where we started
Unlike the Fed or the Bank of England, the ECB looks to have more time before excess reserves reach levels where bigger shifts in banks' behaviour will become obvious. Recourse to the ECB facilities remains relatively low and upward pressure on short-term rates is still very gradual
Treasuries are treading water, and really should have performed better on a risk-off Tuesday. But the 10yr seems content at above 4% for now. The 2yr has more open road to trek back down to 3.5%. Wednesday’s refunding announcement should be a box-ticking exercise. The plumbing of the money markets is where all the drama is - keep an eye on it
In September 2019, the system creaked as the Fed had gone too far with bank reserves reduction. We're facing a similar challenge in the coming months as the Treasury replenishes its cash buffer. We identify a range from $2.5tr to $3tr within which bank reserves can settle, likely at the upper end. And if there's an issue, the Fed can always rebuild them
