Halister News

(Bloomberg) -- In addition to limited near-term supply pressure in Treasuries, the recovery in term premium “could be dampened by two dynamics” -- greater capacity in the banking system to absorb Treasury supply and asset rotation by pension funds, Deutsche Bank strategists led by Stuart Sparks say in Oct. 6 note.

• SLR (Supplementary Leverage Ratio) reform has potential to increase the banking system’s ability to absorb Treasury supply
• More importantly, “pension funds have been presented with a substantial window to ‘harvest’ gains” in equities and reallocate to long-duration fixed income, evident in increase in Treasury Strips
  • Record highs for U.S. equities are driving this, along with rising regulatory cost of unfunded pension liabilities
• “While the term premium remains significantly depressed, given the magnitude of the pension-driven asset rotation, we think de-risking flows will have to subside before the long end is freed to re-steepen”
• Still, with ECB poised to end QE, upward pressure on term premium is likely to steepen 10s30s from historically low levels

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net Mark Tannenbaum